What happens 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 loan creates a liability that must be considered when determining the policy's death benefit. Specifically, the amount borrowed is subtracted from the policy's total death benefit, which means that the policy proceeds will be reduced by the outstanding loan balance at the time of the insured’s death.

This reduction occurs because the insurer has the right to recover the loan amount from the death benefit before paying out the remainder to the beneficiaries. Therefore, if a policyowner has taken out a loan and has a remaining balance at the time of death, the beneficiaries will receive the policy's face value minus the loan amount, effectively decreasing the total amount they would otherwise receive.

Understanding this concept is crucial for policyowners as it affects both the immediate financial options available to them (through accessing cash value) and the future financial security of their beneficiaries.