Texas Life Agent Practice Exam

What happens if a policyholder takes a loan against their life insurance policy?

1. The death benefit is reduced by the loan amount

2. Additional premiums must be paid immediately

3. The policy is canceled automatically

4. The policy cannot earn interest

The correct answer is: The death benefit is reduced by the loan amount

When a policyholder takes a loan against their life insurance policy, the death benefit is indeed reduced by the amount of the outstanding loan. This occurs because the insurance company has a claim on the policy's cash value to secure the loan. If the policyholder passes away before repaying the loan, the insurer will subtract the loan amount from the death benefit payable to the beneficiaries. Therefore, if a policyholder has borrowed against their policy, it is essential for them to be aware that any unpaid loans at the time of death will directly diminish the financial protection the policy provides. In contrast, taking a loan does not require the immediate payment of additional premiums, as the policy remains in force as long as the premiums are paid, which makes the second option inaccurate. The third option is also incorrect since the policy does not automatically cancel just by taking a loan; it remains active as long as the premiums are maintained. Lastly, the policy can continue to earn interest on the cash value even after a loan is taken, assuming its structure allows for such growth, which contradicts the provided information in the fourth option. Understanding these nuances is crucial for managing a life insurance policy effectively.