Tennessee Insurance Practice Exam

What will happen to the outstanding loan balance at the time of the policy owner's death?

1. It is ignored by the insurer

2. It is paid from the insured's estate

3. It is deducted from the policy proceeds

4. It is transferred to the beneficiary

The correct answer is: It is deducted from the policy proceeds

When a policy owner passes away, any outstanding loan balance against a permanent life insurance policy is typically deducted from the policy proceeds before they are paid out to the beneficiaries. This occurs because the policy's cash value may have been used as collateral for the loan, and therefore, the insurer must recover the amount that is owed before disbursing the remaining benefits. This ensures that the insurer is not left with a financial liability resulting from loans taken out by the policy owner. The remaining amount, after the loan is deducted, is then paid to the specified beneficiaries. This process underscores the importance for policyholders to be aware of any loans taken against their policy, as it will directly affect the eventual payout their beneficiaries receive. Understanding this aspect reinforces the idea that while life insurance is intended to provide financial support for loved ones after one's passing, the existence of an outstanding loan can significantly reduce that support.