South Carolina Life Insurance Practice Exam

What is the likely outcome if an individual fails to repay a policy loan?

1. The policyholder loses the entire insurance coverage

2. The death benefit is reduced by the loan amount

3. The interest will be waived

4. The premium payments are decreased

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

If an individual fails to repay a policy loan, the death benefit of the life insurance policy is likely to be reduced by the amount of the outstanding loan. This occurs because the insurer treats the unpaid loan balance as an amount owed against the policy. In the event of the insured's death, the insurance company will deduct the loan amount from the death benefit before paying out the remaining balance to the designated beneficiaries. Thus, if a policyholder takes out a loan against their policy and does not repay it, their beneficiaries will receive a death benefit that is less than the total face value of the policy. The other options do not accurately reflect the consequences of failing to repay a policy loan. The entire insurance coverage is not lost; instead, it continues but with reduced benefits. Interest on the loan will generally continue to accrue and is not waived. Additionally, premiums paid by the policyholder do not get decreased because of an unpaid loan; these obligations remain unchanged unless specifically altered by the policy terms.