A short sale has to be approved by your lender because it will not receive the full amount of the outstanding loans. (turbotax.intuit.com)
That means if you have a loan out on your policy and you pass away, your death benefit will be reduced by the total amount of the outstanding loan. (choicemutual.com)
Failure to pay back the loan results in ordinary income tax and early withdrawal penalties on the full amount of your outstanding loan. (gobankingrates.com)