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Understanding Automatic Premium Loans In order to take an automatic premium loan, you have to have
a cash-value life insurance policy, in which every premium you pay adds to the cash value of the policy. 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 is a value over and above the face value of the policy and can be borrowed against by the policyholder at their discretion. An automatic premium loan is essentially a loan taken out against the policy and does carry an interest rate. If the policyholder continues to use this method of paying the premium, it is possible that the cash value of the insurance policy will reach zero. At this point, the policy will lapse because there is nothing left against which to take out a loan. If the policy is canceled with an outstanding loan, the amount of the loan plus any interest is deducted from the cash value of the policy before it is closed. Note that the policy contract’s language may indicate that no loans may be taken out unless the premium has been paid in full. Special ConsiderationsSince the accrued value is technically the property of the policyholder, borrowing against the cash value does not require a credit application, loan collateral, or other good faith requirements typically found in loans. The loan is taken out against the cash value of the policy, and the loan balance is deducted from the policy’s cash value if not repaid. The policyholder will owe interest on the loan, just as with a standard loan. Automatic premium loan provisions help both the insurer and the policyholder: The insurer can continue to automatically collect periodic premiums rather than sending reminders to the policyholder, and the policyholder is able to maintain coverage even when they forget or are unable to send in a check to cover the policy premium. The policyholder may still choose to pay the premium by the regularly scheduled due date, but if the premium is not paid within a certain number of days after the grace period, such as 60 days, the outstanding premium amount is deducted from the policy's cash value. This prevents the policy from lapsing. If the automatic premium loan provision is used, the insurer will inform the policyholder of the transaction. An automatic premium loan taken out against an insurance policy is still a loan and, as such, does carry an interest rate. What Kinds of Life Insurance Policies Are Eligible to Include an Automatic Premium Loan Provision?Automatic premium loans can only be made from permanent policies that have a cash-value component. These include whole life policies and some universal life (UL) policies. Because universal life policies deduct expenses from the cash value, they do not always allow ALP. What Is the Automatic Premium Loan Provision Designed to Do?Automatic premium loans are designed to keep life insurance coverage in-force even after the policy owner has not paid the required premiums on time. Perhaps the policy owner is unable to pay due to financial or other difficulties, or simply forgot. Either way, the APL provision allows the death benefit to remain even in such circumstances. Does an Automatic Premium Loan Decrease the Death Benefit of a Policy?Potentially. Any outstanding loans along with interest due will be deducted from the death benefit amount if the insured passes away before these are paid back. What is the automatic premium loan provision?An automatic premium loan is often associated with a life insurance policy that has a cash value. It is a specific clause, or rider, within the policy that allows the insurance issuer to withdraw premium payments from the accrued value of the policy when the policyholder is unable to or neglects to continue paying.
What is the purpose of the automatic premium loan provision quizlet?The automatic premium loan provision permits the insurer to automatically use the policy cash value to pay an overdue premium. The correct answer is: The insurer will automatically use the policy cash value to pay an overdue premium.
Which provision allows an insurer to borrow from the cash value?Automatic Premium Loan Provision
The automatic loan provision enables the insurer to withdraw funds from the policy if any cash value has accumulated within the contract - to pay for any premiums that may not be paid by the policyowner.
What happens when a policy is surrendered for its cash value?What happens when a policy is surrendered for cash value? When a policy is surrendered, you'll lose coverage and no longer be responsible for paying insurance premiums. If your policy has cash value, you'll get this money after surrender fees have been taken into account.
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The automatic premium loan provision authorizes an insurer to withdraw from the policies cash value the amount of
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