What happens to the loan amount if a policyowner has borrowed from their life insurance policy's cash value and then dies?

When a policyowner borrows against the cash value of their life insurance policy and subsequently dies, the outstanding loan amount is deducted from the total policy proceeds. This means that the beneficiaries will receive the death benefit minus the amount that was borrowed.

This system is in place because any loans taken against the policy are considered a lien on the cash value. Therefore, when the insured passes away, the insurance company must recover the amount it has loaned out to ensure that it does not lose money. The result is that the net benefit received by the beneficiaries reflects this loan deduction, making it crucial for policyowners to consider how borrowing might influence their loved ones' financial support when they pass away.