What does the policy loan limit restrict to ensure it does not exceed the cash value of the policy?

The policy loan limit is designed to restrict the amount borrowed from a life insurance policy to ensure it does not exceed the cash value of the policy. In essence, the cash value represents the amount of money that the policyholder has accumulated in their policy through premium payments, which can be accessed as a loan. This limit is crucial because if the loan amount surpassed the cash value, it would create a risk for the insurance company, and the policy could lapse due to insufficient collateral to cover the loan.

Setting the loan limit to the cash value ensures that the policyholder can borrow funds while still maintaining the integrity and solvency of the insurance policy. This control also protects the policyholder from taking on more debt than their policy can support, helping to manage financial risk effectively.