Massachusetts Life Producer Practice Exam

What happens to a policyholder's loan amount if they die after borrowing from their life insurance policy's cash value?

1. The loan amount is returned to the beneficiary.

2. The loan amount is deducted from the policy proceeds.

3. The loan amount remains intact.

4. The loan is completely forgiven.

The correct answer is: The loan amount is deducted from the policy proceeds.

When a policyholder takes out a loan against the cash value of their life insurance policy and subsequently passes away, the outstanding loan amount is deducted from the policy proceeds. This is because the loan represents a claim against the policy's cash value. Life insurance policies often allow policyholders to borrow against the accumulated cash value, but any amount that is borrowed must be repaid, along with any applicable interest, in order to ensure that the full face value of the policy is available to beneficiaries upon the policyholder's death. If the loan is not repaid before death, the insurance company deducts the outstanding loan balance from the death benefit. This ensures that the life insurance company recoups the amount that was lent to the policyholder, effectively reducing the amount paid out to the beneficiary. Therefore, the correct answer reflects how borrowed funds from a life insurance policy affect the overall value transferred upon the insured's death.