Policy loans and unpaid premiums that reduce the payout: the math

The number on the front of a life insurance policy is the face amount, and the check a beneficiary receives is often a different number. The difference is made up of items the insurer is allowed to subtract, such as an outstanding policy loan and the interest on it, or a premium that was due but not paid, and items it may add, such as dividends and refunded premiums. None of this is hidden, but it is rarely explained until the payment letter arrives.

This post is a worksheet. It sets out the arithmetic in the order insurers usually apply it, works two examples with round numbers, shows how the result splits among several beneficiaries, and explains how to ask for an itemized claim statement so that you can check each line. All the figures are invented illustrations for the purpose of showing the method, not any company's rates or any real policy. Your contract decides which items apply to you.

What can change the payout

Start with the list of items that can move the amount. Not every policy has all of them.

Items that commonly reduce the payment:

• An outstanding policy loan. If the owner borrowed against the policy's cash value and has not repaid it, the insurer repays itself from the proceeds. See life insurance policy loans: how they work and what they risk for how loans work.
• Accrued loan interest. Interest builds up from the last date it was charged to the date of death. Many policies add unpaid interest to the loan on each anniversary, so the balance on the last anniversary already contains earlier interest.
• An unpaid premium that was due. If the insured died during a grace period, the contract may allow the insurer to deduct the premium that was owed. The guide to life insurance grace periods and lapses explains the mechanics.
• Earlier withdrawals. In some universal life policies, partial withdrawals reduce the death benefit.
• A prior advance. Some policies with accelerated benefit riders have already paid part of the death benefit, which comes off the remainder.

Items that may increase it:

• Dividends and paid-up additions on participating whole life. See whole life dividends: how participating policies pay.
• Dividend accumulations left on deposit, with interest.
• A refund of premium paid for a period after the date of death.
• Interest for a delayed payment, covered in interest on a delayed payout: the arithmetic and the tax treatment.

The order in which these are listed on the insurer's statement varies, but the arithmetic does not depend on the order. Add the additions, subtract the reductions, and the answer is the same.

The worksheet

Here is the sequence to follow. Each line has a source: the policy, the most recent annual statement or the insurer's claim statement.

How to compute accrued loan interest (line G)

Use this formula:

Loan balance × annual rate × days since the last interest date ÷ 365

Some policies compute interest on a different basis, such as monthly or on a 360-day year, so use the contract's method when you have it. The result is close enough to check whether the insurer's number is in the right range.

Worked example 1: a loan and a premium due

Say a whole life policy has a $200,000 face amount. The owner took a loan years ago, and the loan balance on the most recent policy anniversary was $15,000, including interest that had been added in earlier years. The loan interest rate is 5 percent a year, illustrative. The insured dies 146 days after that anniversary. A quarterly premium of $400 had come due 20 days before the death and had not been paid, and the contract lets the insurer deduct it.

Compute line G first.

• $15,000 × 5% = $750 a year
• $750 × 146 ÷ 365 = $300

Now fill the worksheet.

The check: $200,000 − $15,000 − $300 − $400 = $184,300. The beneficiary receives $184,300, which is $15,700 less than the face amount.

Worked example 2: a policy with additions, dividends and a refund

Now a different invented policy. It has a $200,000 face amount, $6,500 of paid-up additions that were bought with dividends and $1,200 of dividend accumulations sitting on deposit. The loan balance is again $15,000 with $300 of accrued interest. No premium is unpaid. The owner had paid a $1,200 annual premium on January 1 and the insured died on April 20. The contract refunds the part of the premium that covers the months after the month of death, which is May through December, eight months.

First the refund (line D):

• $1,200 × 8 ÷ 12 = $800

Then the worksheet:

The check: $200,000 + $6,500 + $1,200 + $800 = $208,500, and $208,500 − $15,000 − $300 = $193,200. In this example the additions and refund more than offset the cost of the loan, though the beneficiary still receives less than the gross amount. Many term policies and most low-cost final expense policies do not have additions or dividends, so the first example is more typical for them.

Worked example 3: a small loan left alone for five years

The first two examples start from a loan balance that is already known. The third shows how a small loan grows when its interest is never paid, because that is how many beneficiaries meet a balance they did not expect. Say an owner borrows $10,000 against a $100,000 policy at an illustrative 6 percent, and the insurer adds unpaid interest to the loan at each anniversary. The balance after five anniversaries is:

• $10,000 × 1.06 × 1.06 × 1.06 × 1.06 × 1.06 = $10,000 × 1.3382 = $13,382.26

Say the insured then dies 73 days after the fifth anniversary. The accrued interest since the anniversary is:

• $13,382.26 × 6% = $802.94 a year
• $802.94 × 73 ÷ 365 = $160.59

The net death benefit is $100,000 − $13,382.26 − $160.59 = $86,457.15. A $10,000 loan has cost the beneficiary $13,542.85, or about 35 percent more than the sum borrowed. Had the owner paid the interest each year, the loan would still have been $10,000 and the deduction about $10,000 plus a few hundred dollars of accrued interest. The difference is the compounding, and it is the reason an annual loan statement is worth reading.

Splitting the net amount among beneficiaries

When more than one beneficiary is named, insurers generally apply the loan and other deductions to the total before dividing it, so every beneficiary bears a proportional share. This is the usual approach, but the policy can say otherwise, and a beneficiary designation can sometimes be written so that a fixed dollar amount goes to one person first.

Say the example 1 policy names two beneficiaries, 60 percent to the insured's daughter and 40 percent to the insured's son.

• Daughter: $184,300 × 0.60 = $110,580
• Son: $184,300 × 0.40 = $73,720
• Total: $110,580 + $73,720 = $184,300

Beneficiaries can be surprised when a designation says "$100,000 to my daughter and the rest to my son." In that wording, the daughter's amount may be fixed, and the son's share absorbs the entire reduction. Reading the exact words on the form matters. The guide to how to choose a life insurance beneficiary discusses how wording affects outcomes.

What the numbers mean for taxes

The net amount is generally what matters. Under federal income tax rules, life insurance death benefits paid to a named beneficiary are generally not included in income, and the amount used to repay a loan is part of the proceeds, so it does not create income for the beneficiary. Interest the insurer pays on a delayed benefit is taxable, as the guide on is life insurance taxable? explains. If the insurer adds that interest, it appears as its own line, separate from the death benefit.

The owner's side is different, and it is worth understanding even after a death. While the policy is in force, a loan from a policy that is not a modified endowment contract is generally not taxed. A policy that lapsed with a loan outstanding can produce taxable income for the owner. The mechanics are in how cash value is taxed: withdrawals, loans and surrenders. If the insured owned the policy, the death benefit generally counts in the gross estate for federal estate tax purposes; the federal basic exclusion is $15,000,000 per person in 2026, so most estates are well below it, though some states have their own estate or inheritance taxes. A policy that was transferred, sold or held by a business raises different questions. A tax professional is the right person for any of these.

How to request an itemized claim statement

You do not have to accept a single-line figure. Ask the insurer to explain it. A short written request is enough, and it can be sent with the claim forms or after you receive the payment letter. Something like:

Please send an itemized statement of the death benefit payable under policy number [number], showing the face amount, any riders or additions payable at death, any dividends or accumulations, the policy loan balance and the date and method used to calculate accrued interest, any premium deducted and the period it covers, any premium refunded, and the total payable. Please also state the date the statement is calculated to and the date payment will be made.

Then:

1. Send it with proof of delivery and keep a copy.
2. Compare it with the last annual statement. The loan balance, the additions and the accumulation should be close to the figures on the most recent statement, adjusted for the time since.
3. Recompute the interest with the formula above. If the insurer's number is much larger than yours, ask for the calculation.
4. Look for the premium line. If the policy was in force when the insured died, ask which clause allows the deduction.
5. Ask when payment will be made. If payment is delayed, interest may be owed.
6. Raise differences in writing. If a line seems wrong, tell the insurer which one and why, and ask for a corrected statement.
7. Contact the state insurance department if the insurer will not explain the calculation. See how to file a complaint against a life insurer.

The life insurance claim checklist and the policy loan calculator can help you gather the inputs and test what a loan balance becomes over time.

Reading the payment letter against the worksheet

When the insurer's letter arrives, look for the pieces in the same order as the worksheet. A good letter shows the gross amount, lists each deduction by name and states the date through which interest was calculated. A poor one shows a single net figure and nothing else. If yours is the second kind, you have not been wronged yet, but you cannot check anything either, and the request above is the fix.

Three small mismatches are common and usually harmless. The insurer may compute interest on a 360-day year, which produces a slightly larger number than the 365-day formula. It may charge interest through the date it pays rather than the date of death, which matters in a delayed claim. And it may round balances to the nearest dollar. Differences of a few dollars are not worth a dispute. A difference of hundreds is worth a question, and so is any deduction you cannot match to a line in the contract.

Keep the itemized statement with the claim papers. If the estate is settled later, the executor and a tax preparer may want to see how the net figure was built, and the statement is the only record that shows it.

Your own blanks

Copy this and fill it in from your own policy and statements.

For interest on line G, write the balance ______, the rate ______ percent, the number of days ______, and compute balance × rate × days ÷ 365.

When the loan is bigger than expected

Sometimes the shock is the loan itself. A relative may have borrowed against the policy years ago, an automatic premium loan may have paid premiums quietly, or interest may have compounded. If the loan is large, take these steps:

• Confirm the policy was in force. If the loan and interest had overtaken the cash value, the policy may have terminated before the death; see death during the grace period or after a lapse: how those claims work.
• Check the history. Ask for a transaction history showing each loan, each repayment and each interest charge. A missing repayment or an interest charge that does not match the contract rate is a reason to question the balance.
• Ask whether a rider applied. An overloan protection riders: how they prevent a taxable lapse, if the policy had one and it was properly exercised, changes what happens as loans approach the cash value.
• Plan on the net amount. Count on the net figure, not the face amount, when making decisions about funeral costs and debts.

Key takeaways

• The check is usually the face amount plus any additions and refunds, minus the loan, accrued loan interest and any premium the contract lets the insurer deduct.
• Accrued interest is balance × annual rate × days since the last interest date ÷ 365, which lets you test the insurer's figure.
• With several beneficiaries, deductions generally come off the total before the shares are divided, unless the designation words them differently.
• The net death benefit is generally income-tax-free to the beneficiary. Interest paid for a delay is taxable.
• Ask in writing for an itemized claim statement and compare it with the last annual statement before accepting the number.