An automatic premium loan (APL) is an insurance policy provision that allows the insurer to deduct the amount of an outstanding premium from the value of the policy when the premium is due.
Automatic premium loan provisions are most commonly associated with cash value life insurance policies, such as whole life, and allow a policy to continue to be in force rather than lapsing due to nonpayment of the premium.
Key Takeaways
- Maintain Coverage: Automatic premium loans allow for the cash value of a permanent life insurance policy to be applied to overdue premium payments.
- Automatic Protection: As the name implies, this is done automatically once premium payments are a certain amount of time overdue.
- Prevent Termination: The purpose is to avoid having a policy lapse, which would terminate coverage.
- Loan Structure: The payment is structured as a policy loan, and so will also require interest payments.
- Cash Value Dependency: Automatic premium loans are only viable if the policy’s cash value is equal to or greater than the overdue premium amount.
Understanding Automatic Premium Loans
In order to take an automatic premium loan, you need to have a cash-value life insurance policy, where each premium paid enhances the policy’s cash value. Depending on the policy language, life insurance policyholders may be able to take out a loan against the cash value of their policy. This accrued cash value exceeds the policy’s face value and can be borrowed against at the policyholder’s discretion.
An automatic premium loan is essentially a loan taken out against the policy and carries an interest rate. Persistent usage of this method to pay the premium may deplete the insurance policy’s cash value to zero.
At this point, the policy will lapse as there is nothing left against which to take a loan. If the policy is canceled with an outstanding loan, the loan amount plus any interest is deducted from the cash value of the policy before it is closed. Note that policy contracts may restrict loans unless the premium has been paid in full.
Special Considerations
Since the accrued value technically belongs to the policyholder, borrowing against the cash value does not require a credit application, loan collateral, or other requirements typical of standard loans. The loan is drawn from the policy’s cash value, and the unpaid loan balance gets deducted from this value. Policyholders will owe interest on the loan, akin to standard loans.
Automatic premium loan provisions benefit both the insurer and the policyholder: The insurer maintains regular premium collections without needing to send reminders, and the policyholder retains coverage even when they forget or cannot pay the premium check.
Policyholders may still opt to pay their premiums on the due date, but if payment isn’t made within the grace period – often 60 days – the outstanding premium sum is deducted from the policy’s cash value. This prevents the policy from lapsing. Insurers inform policyholders when the automatic premium loan provision is activated.
Eligibility for Automatic Premium Loan Provisions
Automatic premium loans apply only to permanent policies that have a cash-value component, including whole life policies and some universal life (UL) policies. Since universal life policies deduct expenses from the cash value, not all allow APL.
Purpose of the Automatic Premium Loan Provision
Automatic premium loans are designed to keep life insurance coverage active even when the policy owner hasn’t made timely premium payments. This could be due to financial hardships, forgetfulness, or other reasons. Regardless, the APL provision certifies that the death benefit remains intact.
Impact on Death Benefit
Outstanding loans and due interest will reduce the death benefit amount if the insured passes away before repaying them.
Related Terms: premium, whole life insurance, cash value life insurance, life insurance loan, universal life insurance.
