If a policy loan is outstanding at death and remains unpaid, what happens to the death benefit?

• A. The death benefit is reduced by the outstanding loan amount plus accrued interest.
• B. The death benefit is paid in full regardless of the loan.
• C. The policy lapses and no benefit is paid.
• D. The loan is paid from the death benefit to the policy owner.

Answer: (A)

When a policy loan is outstanding at death, the death benefit is reduced by the outstanding loan balance plus accrued interest. The loan is a debt against the policy’s cash value, so the insurer uses part of the death benefit to repay that debt first. The remaining proceeds, if any, go to the beneficiaries. This is why the correct outcome is a reduced benefit rather than the full face amount.

The other options don’t fit because the loan isn’t paid in full to the insured or to the owner while the insured has died, and the policy doesn’t automatically lapse simply because of an outstanding loan—the loan reduces the payout rather than being paid out separately. If the loan and interest fully offset the death benefit, the beneficiaries could receive nothing.