What will happen if an outstanding policy loan, plus interest, exceeds the cash value of the policy?

When an outstanding policy loan, along with accrued interest, surpasses the cash value of the life insurance policy, the policy will lapse. This occurs because the total loan amount owed effectively exceeds the value that the insurance company can collateralize against the policy. In life insurance policies, the cash value is often used as collateral for policy loans, and when the outstanding debt exceeds this value, the insurer has no further obligation to maintain the policy.

In essence, policy loans reduce the cash value, and if the loan plus interest outstrips that cash value, the policy cannot sustain itself and will terminate. This scenario illustrates the importance of monitoring outstanding loans against the cash value to ensure that the policy remains in force.