Policy loans: what happens to the loan and accrued interest at death or policy surrender?

• A. The loan is forgiven at death or surrender.
• B. The loan is repaid from the policy's cash value at death.
• C. The death benefit is increased by the loan amount.
• D. The loan plus accrued interest will be repaid upon the insured's death or policy surrender.

Answer: (D)

Policy loans create a lien on the cash value of a permanent life policy. The loan plus any accrued interest remains owed to the insurer and is not forgiven.

If the insured dies with an outstanding loan, the death benefit is reduced by the loan balance plus accrued interest. In other words, the loan is repaid to the insurer out of the death benefit, and beneficiaries receive the remainder.

If the policy is surrendered, the loan is repaid from the policy’s cash surrender value. The surrender proceeds are the cash value minus the loan, and any remaining value after repayment is received by the policyowner.

So, in both cases, the loan and its accrued interest are repaid to the extent allowed by the policy’s value. This makes the statement that the loan plus accrued interest will be repaid upon death or surrender the best description.