What is the consequence when a policyowner borrows against the cash value of a life insurance policy?

When a policyowner borrows against the cash value of a life insurance policy, the outstanding loan balance reduces the death benefit. This occurs because the loan is considered a debt against the policy. In the event of the policyholder's death, the insurance company will deduct the amount of the outstanding loan from the total death benefit payable to the beneficiaries.

For example, if a policy has a death benefit of $100,000 and the policyowner has taken out a loan of $25,000 against the cash value, the beneficiaries would receive only $75,000 upon the insured's death, as the insurance company recoups the loan amount first.

This mechanism serves to protect the insurance company's financial interests while maintaining a cash value safety net for the policyowner. Understanding this dynamic is essential for managing life insurance policies efficiently, especially if there is a chance the policyowner might need to take out loans against the cash value for financial needs.