Many permanent life insurance policies allow the policy owner to borrow money against the policy’s cash value. These loans can be useful for emergencies, business needs, or personal expenses. However, unpaid policy loans can sometimes create problems when a life insurance claim is filed.
In some cases, insurers reduce the death benefit by the loan balance. In other situations, the insurer may claim that the policy lapsed because the loan and accumulated interest exceeded the policy’s remaining value.
Attorney Christian Lassen represents beneficiaries nationwide in disputes involving delayed and denied life insurance claims.
How Life Insurance Policy Loans Work
Whole life and universal life policies often build cash value over time. Policy owners may borrow against this value without going through a traditional loan approval process.
A policy loan typically works like this:
The policy owner requests a loan from the insurer
The insurer advances money from the policy’s cash value
Interest accrues on the outstanding balance
The loan remains secured by the policy
The loan does not usually require monthly payments. Instead, interest accumulates and is added to the balance.
What Happens When the Insured Dies With a Policy Loan
If the insured dies while a loan is still outstanding, the insurer generally subtracts the loan balance and accumulated interest from the death benefit.
For example:
A policy has a $400,000 death benefit
The policy loan balance is $75,000
Interest owed at the time of death is $5,000
The insurer may pay the beneficiary $320,000 after subtracting the loan and interest.
In these situations the policy remains valid, but the payout is reduced.
When Loans Cause Policy Lapse
A more serious issue arises when the loan balance grows large enough to exceed the remaining cash value of the policy.
If the loan and interest become greater than the policy’s value, the insurer may declare the policy lapsed before the insured’s death.
This situation can occur when:
The loan remains unpaid for many years
Interest continues to accumulate
The policy owner stops paying premiums
The policy value declines
If the insurer determines that the policy lapsed before death, it may deny the claim entirely.
Why Beneficiaries Are Often Surprised
Many beneficiaries are unaware that the policy owner borrowed against the life insurance policy. Policy loans can occur years before death, and statements about the loan may only be sent to the policy owner.
As a result, beneficiaries sometimes discover the loan only when the insurer explains that the death benefit has been reduced or the policy allegedly lapsed.
Notice Requirements Before Lapse
Most life insurance policies require insurers to provide notice before terminating a policy due to a loan related lapse.
These notices often warn the policy owner that:
The loan balance is approaching the policy value
Interest is continuing to accumulate
The policy may terminate if action is not taken
Disputes sometimes arise when beneficiaries claim the policy owner never received proper notice.
Disputes Over Loan Calculations
Another issue that sometimes arises involves how the insurer calculated the loan balance and accumulated interest.
Questions may include:
Whether interest was calculated correctly
Whether loan payments were properly credited
Whether policy statements accurately reflected the loan balance
Whether the insurer provided proper warnings before lapse
These calculations can affect whether the policy remained in force at the time of death.
Records That May Be Important
When a life insurance claim is denied due to a policy loan, several types of records may become important.
These may include:
Policy loan agreements
Annual policy statements
Premium payment records
Lapse notices sent by the insurer
Correspondence between the policy owner and the insurer
Reviewing these documents can help determine whether the insurer’s decision was correct.
Legal Help With Policy Loan Life Insurance Disputes
Life insurance claims involving policy loans can become complicated when insurers argue that the loan caused the policy to lapse before death. Beneficiaries are sometimes surprised to learn that the policy owner borrowed against the policy years earlier.
The Lassen Law Firm focuses exclusively on life insurance disputes nationwide. Attorney Christian Lassen has more than 25 years of experience representing beneficiaries in delayed, denied, and disputed life insurance claims.
If a life insurance claim has been denied because of an unpaid policy loan or alleged policy lapse, legal review may help determine whether the policy was still in force when the insured died.