Policy loan offset is the process by which an insurance company reduces a life insurance policy's death benefit or cash value by the amount of an outstanding policy loan and accrued interest. Upon the insured's death, the carrier calculates the gross death benefit, subtracts the current loan balance, and pays the net amount to the beneficiary. Similarly, at surrender the carrier deducts the loan balance from the gross cash surrender value before paying the net proceeds to the policyowner. The offset mechanism is fundamental to how policy loans work, since the cash value serves as collateral for the loan. Policy documents and annual statements typically disclose loan balances and the net death benefit after offset so owners and beneficiaries understand how borrowing affects their ultimate payout.

In practice, advisors explain policy loan offset when clients are considering borrowing from their policies or when beneficiaries receive a benefit that is lower than the stated face amount. Many policy review conversations include a side-by-side comparison of gross versus net death benefit, highlighting how outstanding loans and interest would be handled at claim. Agencies sometimes discover confusion when clients believe loans are automatically "forgiven" at death; advisors clarify that the loan is effectively repaid through the offset before any money reaches the beneficiary. Understanding policy loan offset is especially important in business planning, where loans taken for buy-sell, key person, or executive benefits may materially change the funds available to the company or surviving shareholders at claim time.