What happens if a policyholder defaults on a policy loan?

When a policyholder defaults on a policy loan, the outstanding loan balance is typically deducted from the death benefit. This means that if the policyholder has taken a loan against the cash value of their life insurance policy and then fails to repay that loan, the insurance company will reduce the amount payable to beneficiaries upon the insured's death by the amount of the loan that is outstanding.

This provision exists to protect the insurance company from potential losses while still allowing policyholders the flexibility to borrow against their policies. The remaining death benefit reflects the value of the coverage after accounting for the loans taken, ensuring that the insurance remains a viable financial product for both the policyholder and the insurer.

The other options do not accurately represent the consequences of defaulting on a policy loan. For instance, the automatic cancellation of the policy (first choice) does not occur solely due to a loan default, as the policy remains in force until other specific criteria are met. Similarly, increasing premiums (third choice) and the necessity of repaying the loan prior to any claims (fourth choice) do not apply under standard policy agreements regarding loans, which allows claims to be paid out, minus any unpaid loan amounts.