What happens if a policyholder does not repay a policy loan?

When a policyholder takes out a loan against their variable life insurance policy but fails to repay it, the most significant consequence relates to the death benefit. The death benefit may be reduced because the loan amount, along with any accumulated interest that has not been paid back, will be deducted from the total death benefit payable to beneficiaries upon the policyholder's death.

This is an important aspect of variable life insurance policies, where policyholders have the flexibility to borrow against the cash value without affecting the policy's status. However, the outstanding loan balance remains a liability in the context of the death benefit calculation. Therefore, if the policyholder does not repay the loan, it does not lead to a total loss of the death benefit but rather a decrease, in accordance with the balance owed.

This understanding highlights the balance between the flexibility of accessing cash value and the implications of not managing loans properly in a life insurance context.