AD Banker Comprehensive Practice Exam

Why should a policyowner be especially careful when deciding to increase the amount of an outstanding policy loan?

1. If the loan amount, plus interest charged exceeds the face amount at death, the beneficiary would owe the insurance company the balance of the loan

2. If the outstanding loan balance, plus interest, equals or exceeds the cash value of the policy, the company could cancel the insurance

3. If a loan payment is not established within one year, the insurance company may cancel the policy

4. If the loan amount is more than the premiums paid, the policy could be cancelled

The correct answer is: If the outstanding loan balance, plus interest, equals or exceeds the cash value of the policy, the company could cancel the insurance

A policyowner should be especially careful when deciding to increase the amount of an outstanding policy loan because if the outstanding loan balance, together with accrued interest, reaches or exceeds the cash value of the policy, the insurance company may have the right to terminate the policy. This situation arises because life insurance policies typically have a cash value component, which is the amount of money the policyowner can access through loans or withdrawals. However, loans taken against the policy reduce the available cash value. When the total of the outstanding loan and interest surpasses this cash value, it can jeopardize the policy's status and prompt the insurer to cancel the coverage. This emphasis on maintaining the loan balance below the policy's cash value protects the policyholder from losing their insurance and benefits unexpectedly. Monitoring the loan amount and interest accrued is crucial to ensure that the loan does not reach a detrimental level relative to the cash value.