AD Banker Comprehensive Practice Exam

If an insured has an outstanding loan of $5,000 on a policy with a face amount of $25,000, how much will the company pay the beneficiary at death?

1. Pay the beneficiary $20,000, after subtracting the amount of the outstanding loan

2. Cancel the policy

3. Pay the beneficiary the full $25,000 face amount

4. Institute a required loan repayment schedule before allowing the death claim to be processed

The correct answer is: Pay the beneficiary $20,000, after subtracting the amount of the outstanding loan

When a policyholder has an outstanding loan against their life insurance policy, the insurer typically deducts the amount of the loan from the policy's death benefit when a claim is made. In this case, the insured has a $5,000 loan on a policy with a face amount of $25,000. Upon the death of the insured, the insurance company would first calculate the total benefit that would be payable, which is the face amount of the policy—$25,000. However, since there is an outstanding loan of $5,000, this amount is subtracted from the death benefit. Thus, the calculation would look like this: $25,000 (face amount) - $5,000 (outstanding loan) = $20,000. Therefore, the company would pay the beneficiary $20,000. This approach ensures that the insurer is made whole by recovering the lent amount while still providing a death benefit to the beneficiary. Other choices do not align with standard practice in life insurance regarding outstanding loans on the policy.