Life & Health Insurance Practice Exam 2025 - Free Practice Questions and Study Guide

When the loan balance of a life insurance policy exceeds its cash value, the consequence is that the policy will no longer be enforced. This situation arises because the cash value of a permanent life insurance policy serves as collateral for loans taken against it. If the outstanding loan amount surpasses the cash value, the insurance company typically cannot maintain the policy in force since it no longer has sufficient cash value to cover the loan obligations.

In this situation, the policy effectively terminates, and the insurance coverage will lapse unless the policyholder takes action, such as repaying the loan or adding money to restore the cash value. This consequence emphasizes the importance of managing loans against life insurance policies carefully, as neglecting the repayment can lead to the loss of not only the insurance coverage but also any accumulated cash value.

The other options do not accurately describe the outcome of such a scenario. For example, while the policy could be cancelled, this occurs specifically because it can no longer be enforced, rather than as an automatic action. The other options also do not reflect the nuance of the interactions between loan amounts and cash value in the context of life insurance policies.