Massachusetts Life Producer Practice Exam

What could be the potential result of taking out a cash value loan under a life insurance policy?

1. Increased cash value

2. Higher death benefits

3. Reduction of the amount receivable upon surrender of the contract

4. Immediate payment to the policyowner

The correct answer is: Reduction of the amount receivable upon surrender of the contract

Taking out a cash value loan against a life insurance policy results in a reduction of the amount receivable upon surrender of the contract because the loan must be repaid. When a policyholder borrows against the cash value, the amount of the loan is treated as an advance against the death benefit and cash value. Consequently, if the policyowner later decides to surrender the policy, the cash value will be reduced by the outstanding loan amount, meaning they will receive less than they would have had the loan not been taken. This outcome is crucial for policyholders to understand because it impacts the financial benefits of their policy. If they do not repay the loan, both the loan amount and any interest accrued will be deducted from the death benefit, leaving beneficiaries with less coverage. Thus, while loans can be a useful tool for financial needs, they can also diminish the overall value of the policy if not managed carefully.