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

When a policy loan balance exceeds the life insurance policy's cash value, the policy typically terminates. This occurs because the loan effectively reduces the available cash value that the insurer has provided as collateral for the loan. If the outstanding loan amount surpasses the cash value, the policy cannot sustain itself any longer, leading to its termination.

Understanding this concept is crucial as it highlights the potential risk associated with taking out loans against a life insurance policy. If a policyholder borrows against their policy without considering the impact on the cash value, they might inadvertently find themselves in a situation where the policy lapses due to an excessive loan balance. This termination can result in the loss of coverage and any associated benefits.

In contrast, the other options do not accurately reflect the consequences of a policy loan exceeding the cash value. For instance, while some policies may require approval for additional loans, the core issue of exceeding cash value leads to termination rather than just an approval process. Similarly, a policy being deemed void or uncollectible does not align with standard practices in life insurance, nor does it generally lead to a policy being converted into a paid-up status, as those are separate provisions and conditions of insurance policies. Understanding these nuances can greatly assist policyholders in