What might happen if an outstanding policy loan is not repaid?

When an outstanding policy loan is not repaid, the death benefit may be reduced because the insurance company will deduct the unpaid loan amount from the death benefit payout. This occurs because the policy loan is essentially a borrowing against the cash value of the policy. If the loan is not repaid, the insurer has a claim on the cash value to recover the loan amount upon the death of the policyholder. Therefore, the amount that beneficiaries receive as a death benefit will be lower than it otherwise would have been, reflecting the outstanding loan balance.

The other choices do not accurately reflect the consequences of an unpaid policy loan. The loan amount is not forgiven, and rather than being eligible for surrender, the policy continues to exist with adjusted benefits. Additionally, premiums do not automatically decrease as a result of an outstanding loan; they typically remain the same unless adjusted by the policyholder or insurer under other circumstances.