Connecticut Life Producer Practice exam

What happens to an unpaid policy loan upon the insured's death?

1. The loan is forgiven and does not affect the death benefit

2. The death benefit is increased by the loan amount

3. The outstanding loan amount reduces the death benefit

4. The loan amount is paid directly to the beneficiary

The correct answer is: The outstanding loan amount reduces the death benefit

When a policyholder passes away with an outstanding loan on their life insurance policy, the amount of the loan will be deducted from the death benefit before it is paid to the beneficiaries. This means that the insurance company will first determine the total death benefit amount that would otherwise be payable and then subtract the outstanding loan amount. This deduction ensures that the policyholder's debt to the insurer is settled before the remaining benefit is disbursed to the beneficiaries. In this case, the outstanding loan balance represents a liability against the policy, and the insurer expects to recover this amount. As a result, the beneficiaries receive the death benefit minus the size of the unpaid policy loan. This process is commonplace in life insurance, as it primarily protects the insurer's interests while also ensuring that the policyholder's beneficiaries receive whatever benefit remains after debts are settled.