Life Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
A policyowner has borrowed heavily against the cash value of a whole life policy, and the outstanding loan plus accrued interest now exceeds the policy's cash value. What is the most likely result?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
A policy loan is secured by the cash value. If the loan plus interest grows to exceed the cash value, there is no longer collateral for the debt. The insurer typically gives the policyowner notice and an opportunity to pay the excess; if the policyowner does not, the policy terminates. This is why policyowners are warned that unpaid loans can cause coverage to lapse with possible tax consequences.
Why the other options are wrong
- B) The face amount is not increased when loans exceed cash value; the policy is at risk of termination instead.
- C) Loans are real debts against the policy and are not forgiven when they exceed the cash value.
- D) Loans must eventually be repaid or the policy lapses once the loan balance overtakes the cash value.
Memory hook
Loan + interest beats cash value, and the policy dies. Borrowing against cash value is borrowing from the policy's life.