One of the most common questions in whole life banking is what happens to an outstanding policy loan when the insured person passes away. The short answer: the carrier deducts the loan balance from your death benefit, and your beneficiaries receive the remaining amount.
How the Carrier Settles the Loan
When a death claim is filed, the insurance carrier calculates the total loan balance — including any capitalized interest — and subtracts it from the death benefit before paying out.
Example:
| Item | Amount |
|---|---|
| Death benefit | $500,000 |
| Original loan amount | $100,000 |
| Capitalized interest (accumulated over time) | $20,000 |
| Total loan balance at time of death | $120,000 |
| Net death benefit paid to beneficiaries |