Washington Life Producer Practice Exam

When a policyholder borrows against the cash value of a whole life insurance policy, it is crucial to understand how this impacts the death benefit of the policy. In Joanne's case, she has a whole life policy with a $100,000 death benefit and has borrowed $15,000 against the $25,000 cash value. If these borrowed funds remain unpaid, the outstanding loan amount is deducted from the death benefit when the insured passes away.

Thus, if Joanne does not repay the loan, the net death benefit paid to her beneficiaries will indeed be reduced. In this scenario, the death benefit would be $100,000 minus the $15,000 loan, resulting in a net death benefit of $85,000 upon her death. This reduction occurs because the insurance company needs to first settle the outstanding loan before disbursing any remaining benefits to beneficiaries.

Understanding this mechanism illustrates how borrowed amounts decrease the benefits that loved ones would receive if the policyholder passes away with an outstanding loan. This is why the correct statement regarding the impact on Joanne's whole life policy after borrowing is that the net death benefit will be reduced if the loan is not repaid.