What happens to the outstanding policy loan balance when the insured person dies?

When the insured person dies, the insurer will deduct the outstanding policy loan balance from the policy proceeds. This means that any amount borrowed against the policy must be paid back before the beneficiaries receive the death benefit. The policy itself is considered a contract, and any loans taken from it create a liability against the policy's cash value.

If the policyholder had outstanding loans at the time of their death, the insurance company calculates the death benefit by subtracting these loans from the total death benefit amount. As a result, the beneficiaries receive a reduced payout, which reflects the outstanding debt against the policy. This practice ensures that the insurer can recover the amount it lent to the policyholder while fulfilling its obligation to pay the death benefit to the beneficiaries.