What Is an Automatic Premium Loan?

An Automatic Premium Loan (APL) is a provision found in life insurance policies. This financial mechanism ensures that the policy remains active even if the policyholder fails to make a premium payment on time. If you use the money in your policy to pay for a missed payment, the APL will make sure your policy doesn't stop. This means you can keep having coverage without any breaks.

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Updated on

July 8, 2024

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Glossary

Automatic Premium Loan

Understanding Automatic Premium Loans

An APL operates by tapping into the accumulated cash value of a life insurance policy. If you forget to pay your insurance bill, the insurance company will use money from your policy's savings to cover the cost. This loan accrues interest and must be repaid to maintain the full value of the policy.

Key Mechanism:

Triggering Event: Failure to pay the premium by the due date.
Loan Creation: Automatic loan from the policy's cash value to cover the missed premium.
Interest Accrual: The loan amount accrues interest, which the policyholder must repay.

Obtaining an Automatic Premium Loan

Steps to Get an Automatic Premium Loan:

Policy Inclusion: Ensure the life insurance policy includes an APL provision.
Non-Payment of Premium: APL triggers when a policyholder misses a premium payment.
Automatic Activation: The policy processes the loan using its cash value.

Eligibility Criteria and Requirements:

Cash Value: The life insurance policy must have enough cash value to cover the premium.
Provision Inclusion: The policy must include an APL provision.

Practical Example

Consider a policyholder with a whole life insurance policy that has a cash value of $10,000. If the policyholder misses a $500 premium payment, the insurer will create a loan for $500 from the cash value to cover the premium. The policy remains active, and the loan accrues interest until repaid.

Benefits of an Automatic Premium Loan

Key Advantages:

Maintaining Policy's Active Status: Prevents lapse in coverage, ensuring continuous protection.
Financial flexibility means you can keep your insurance even if you have money troubles. You don't have to pay right away.

Drawbacks of an Automatic Premium Loan

Potential Disadvantages:

Decrease in Cash Value: Loans reduce the policy’s cash value, impacting its worth.
Possible Reduction in Death Benefit: If you don't pay back the loan, they might take the money out of what your family gets when you die. This means they will get less money than expected.

Special Considerations

Important Factors and Conditions:

Interest Rates: Understand the interest rate applied to the loan.
Repayment Terms: Familiarize yourself with the terms for loan repayment.
Policy Provisions: Review specific provisions within the policy about APL.

What Kinds of Life Insurance Policies Are Eligible to Include an Automatic Premium Loan Provision?

Types of Policies:

Whole Life Insurance: Incorporates APL provisions.
Universal Life Insurance: May include APL, depending on the policy specifics.

Examples:

Policies like term life insurance do not include APL provisions as they lack a cash value component.

What Is the Automatic Premium Loan Provision Designed to Do?

The primary purpose of the APL provision is to prevent policy lapse due to missed premium payments. This means that if you can't pay for your insurance on time, the insurance company will use some of the money from your policy to cover it. This helps make sure you don't miss any payments and gives you more protection.

Does an Automatic Premium Loan Decrease the Death Benefit of a Policy?

Impact on Death Benefits:

An APL can decrease the death benefit if the loan and accrued interest are not repaid. When someone dies, the amount of money they owe is taken out of the money their family gets. This might mean the family gets less money than expected.

Scenarios:

If someone with a policy passes away and they still owe money, the money for their family will be less because the loan and interest will be taken out of it.

Conclusion

To sum up, Automatic Premium Loans help people keep their insurance even when they can't pay for it. They have good things about them, but it's important to know the downsides and rules of using them in your policy. If you want to add this to your policy, talk to a money person or an insurance expert for advice on how to use it best.