What potential risk exists if an outstanding loan balance equals or exceeds the policy's cash value?

When an outstanding loan balance equals or exceeds the policy's cash value, it can lead to a situation where the insurance company may cancel the insurance policy. This is because, in many life insurance policies, especially those with cash value components, the loan is secured by the cash value of the policy. If the loan balance surpasses the cash value, the insurer has a legitimate concern regarding the security of the loan, and it may result in a cancellation of the policy to protect its financial interests.

Maintaining the policy indefinitely is not feasible in this scenario since the financial standing of the policy is jeopardized by the current loan situation. The death benefit covering the loan could create further complications and variability that could affect the payout, and taking out a new loan would not be a practical option when there is already an existing loan exceeding the cash value. Hence, the cancellation of the insurance policy is a critical risk in this situation.