If a whole life policy with cash value has a loan outstanding that is not repaid, the net death benefit will be reduced.

• A. Increased
• B. Decreased
• C. Unchanged
• D. Not specified

Answer: (B)

When a whole life policy with cash value has an outstanding loan, that loan acts as a debt against the policy. At death, the insurer pays the death benefit minus the remaining loan balance (and any interest that has accrued on that loan). That means the net amount going to beneficiaries is reduced by how much you owe on the loan.

Think of the loan as money borrowed from the policy’s own cash value. The more you borrow and the longer it stays unpaid (with interest accumulating), the larger the deduction from the death benefit becomes. If the loan balance grows large enough, it can substantially reduce or even wipe out the net death benefit, and in extreme cases could cause the policy to lapse.

So, with an unpaid loan, the net death benefit is decreased.