L is flute length. You edit the Overhang value to adjust how much of the tool sticks out of the tool holder.
Overhang is actually the overall length of the tool holder, from the TTS shoulder to the end of the tool. So it's the same value as what you'll measure when you put the tool holder and tool on the Tormach surface plate and measure it with the height gauge.
You are right. Sprut will detect when the shank of a tool collides with the workpiece.
Pictures being worth a thousand words, here's three examples; the standard Tormach face mill, a 1/2" end mill, and a homemade slitting saw.