Life Insurance Automatic Premium Loan Provision (Terms Explained)
An automatic premium loan provision is a clause included in a cash value life insurance policy that allows the insurance company to take the premium amount out of the policy's cash value if the policyholder doesn't make their payments. This provision ensures a policy doesn't lapse if a policyholder cannot make their payments.
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Brandon Frady
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Brandon Frady has been a licensed insurance agent and insurance office manager since 2018. He has experience in ventures from retail to finance, working positions from cashier to management, but it wasn’t until Brandon started working in the insurance industry that he truly felt at home in his career. In his day-to-day interactions, he aims to live out his business philosophy in how he treats hi...
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UPDATED: Nov 27, 2023
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Our life insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different life insurance companies please enter your ZIP code above to use the free quote tool. The more quotes you compare, the more chances to save.
Editorial Guidelines: We are a free online resource for anyone interested in learning more about life insurance. Our goal is to be an objective, third-party resource for everything life insurance-related. We update our site regularly, and all content is reviewed by life insurance experts.
UPDATED: Nov 27, 2023
It’s all about you. We want to help you make the right life insurance coverage choices.
Advertiser Disclosure: We strive to help you make confident life insurance decisions. Comparison shopping should be easy. We are not affiliated with any one life insurance company and cannot guarantee quotes from any single company.
Our life insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different life insurance companies please enter your ZIP code above to use the free quote tool. The more quotes you compare, the more chances to save.
On This Page
- An automatic premium loan provision is a clause included in some cash value life insurance policies that allows the insurance company to deduct the premium from the policy’s cash value if the policyholder doesn’t make a payment
- The automatic premium loan provision is designed to prevent a policy from lapsing due to nonpayment
- If you take advantage of an automatic premium loan, you must either repay the loan or have it withdrawn from your death benefit before the company pays your beneficiaries
Permanent life insurance policies are typically issued with multiple riders and provisions that specify the details of the policy. One such provision is the automatic premium loan provision which protects policyholders from lapsing on their policy due to nonpayment of their premiums.
Read more below about how the automatic premium loan provision works with a cash value life insurance policy.
If you’d like to compare cash value life insurance policies with automatic premium loan provisions, enter your ZIP code into our free quote comparison tool above.
What is an automatic premium loan provision?
An automatic premium loan provision is an aspect of a life insurance policy that allows the life insurance company to automatically withdraw the premium amount from the value of the policy to prevent the policy from lapsing due to nonpayment. There is generally an automatic premium loan provision grace period — such as 60 days — before the premiums are deducted from the value of the policy.
In general, automatic premium loan provisions are included in life insurance policies with a cash value. Cash value life insurance is a type of permanent life insurance that includes cash value savings, which the policyholder can use either as a loan or to pay premiums.
Therefore, any cash value life insurance policyholder can choose to pay their premiums with the cash value from their policy. However, an automatic premium loan provision is helpful in situations where the policyholder either can’t contact — or chooses not to notify — the life insurance company, because the insurance company has the authority to withdraw the premiums from the cash value each time without approval.
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How does an automatic premium loan provision work?
As mentioned above, an automatic premium loan provision is added to a cash value life insurance policy. The premiums that you pay for a cash value life insurance policy go toward the cash value. Some policies will also allow you to pay as much or as little as you would like to contribute toward the cash value of the policy.
The cash value is above and beyond the face value of the amount. Therefore, if you buy a policy with a $250,000 death benefit, that is the nominal value of the amount, but you can also contribute to a cash value account in addition to the death benefit amount.
Policyholders can elect to borrow against the cash value of the policy, withdrawing it to use for large purchases and necessary expenses. However, the amount that they borrow (plus interest) must be repaid; otherwise, it will be deducted from the death benefit amount when the policyholder passes away.
However, if the premiums remain unpaid, then the policyholder may not be able to borrow against the cash value. And the policy may even lapse, causing them to lose coverage. Therefore, if a policy includes an automatic premium loan provision, the life insurance company has the ability to withdraw the premium from the cash value to cover the policy and prevent it from lapsing.
With that being said, the policyholder must pay back any premiums that are withdrawn from the cash value using the automatic premium loan. If they don’t, it works the same as any other cash value loan which would need to be repaid using the death benefit upon their death.
What is an example of an automatic premium loan provision?
Suppose that Sue has a cash value life insurance policy with an automatic premium loan provision. Her monthly premium is $40 per month, which is comparable to some of the average rates for whole life insurance listed below:
Companies | Age 50 Rates | Age 55 Rates | Age 60 Rates | Age 65 Rates |
---|---|---|---|---|
AAA | $15 | $19 | $26 | $38 |
Accordia Life | $42 | N/A | $101 | N/A |
AIG | $15 | $21 | $26 | $45 |
Assurity | $17 | $23 | $33 | $50 |
Foresters Financial | $13 | $17 | $25 | $34 |
Liberty Mutual | $33 | $39 | $60 | $81 |
MassMutual | $15 | $20 | $28 | $43 |
Mutual of Omaha | $17 | $22 | $29 | $47 |
Prudential | $21 | $24 | $29 | $41 |
State Farm | $23 | $30 | $41 | $60 |
TransAmerica | $17 | $26 | $37 | $60 |
We’ll also show you the average whole life insurance rates for males:
Companies | Age 50 Rates | Age 55 Rates | Age 60 Rates | Age 65 Rates |
---|---|---|---|---|
AAA | $18 | $23 | $37 | $60 |
Accordia Life | $17 | $23 | $56 | $154 |
AIG | $17 | $27 | $38 | $55 |
Assurity | $20 | $28 | $44 | $67 |
Foresters Financial | $15 | $21 | $34 | $44 |
Liberty Mutual | $40 | $55 | $96 | $142 |
MassMutual | $17 | $24 | $36 | $62 |
Mutual of Omaha | $19 | $28 | $42 | $60 |
Prudential | $22 | $28 | $38 | $58 |
State Farm | $27 | $34 | $52 | $83 |
TransAmerica | $20 | $30 | $43 | $71 |
Suppose Sue experiences some unexpected expenses for her home, and she has difficulty making the payments on her life insurance for a few months. During the months that she is unable to meet her premium payments, the insurance company withdraws the premiums from the cash value of her policy to ensure that the policy doesn’t lapse.
After a few months, Sue begins making her premium payments again. And she also starts slowing repaying the loan that was used with the policy loan provision to cover her policy when she couldn’t. (If she didn’t finish paying back the loan before her death, the insurance company would withdraw it from the death benefit before paying her beneficiaries.)
Should I buy life insurance with an automatic premium loan provision?
Overall, an automatic premium loan provision may be a good clause to have included in your life insurance policy. If you ever run into financial difficulties and are unable to make your premium payments, the automatic premium loan provision could save you from a lapsed policy.
In addition, taking a loan out against your policy is easy and more affordable than other loans. You won’t need to endure a credit approval process, and the interest rates are typically lower than those of traditional loans. You also won’t be expected to pay it back by a certain date or within a certain number of payments. However, keep in mind that the loan will continue to grow interest if you let it sit.
If you would like to purchase a cash-value life insurance policy with an automatic premium loan provision, enter your ZIP code into our free quote comparison tool below to find affordable life insurance near you.
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Case Studies: The Benefits of Automatic Premium Loan Provision in Cash Value Life Insurance Policies
Case Study 1: Saving a Policy From Lapse
John, a policyholder, faced financial difficulties and was unable to make premium payments on his cash-value life insurance policy for several months. Fortunately, his policy included an automatic premium loan provision.
The insurance company automatically withdrew the premiums from the cash value, ensuring that John’s policy did not lapse. Once John’s financial situation improved, he resumed making premium payments and started repaying the loan.
Case Study 2: Unexpected Expenses
Sarah, another policyholder, encountered unexpected expenses related to her home and struggled to pay her life insurance premiums. With the automatic premium loan provision in her policy, the insurance company stepped in to cover the premiums from the cash value.
Sarah eventually regained financial stability and resumed regular premium payments, including repayment of the loan.
Case Study 3: Flexibility in Premium Payments
Mark, a policyholder with a cash-value life insurance policy, appreciated the flexibility provided by the automatic premium loan provision. When faced with varying financial circumstances, Mark chose to pay his premiums using the cash value from his policy.
This option allowed him to maintain coverage during times of financial strain without risking a policy lapse.
Frequently Asked Questions
What is a life insurance automatic premium loan provision?
The automatic premium loan provision is a feature commonly found in life insurance policies. It allows the policyholder to borrow money from the insurance company to pay the premium if they are unable to make the payment themselves. This provision ensures that the policy remains in force even if the premium is not paid on time.
How does the automatic premium loan provision work?
If the policyholder fails to pay the premium within the grace period specified in the policy, the insurance company will automatically lend them the necessary funds to cover the premium amount. This loan is secured by the policy’s cash value and accrues interest over time. The loaned amount, including any interest, is deducted from the policy’s cash value.
Is the automatic premium loan provision mandatory in all life insurance policies?
No, the automatic premium loan provision is not mandatory in all life insurance policies. Its inclusion depends on the terms and conditions of the specific policy and the insurance company offering it. Some policies may offer it as an optional rider or as a standard feature.
What are the benefits of the automatic premium loan provision?
The automatic premium loan provision offers several benefits, including:
- Policy Continuation: It ensures that the life insurance policy remains in force even if the policyholder is unable to make a premium payment on time.
- Convenience: It eliminates the need for the policyholder to manually request a loan or make alternative arrangements to pay the premium.
- Preserving Coverage: It prevents the policy from lapsing, which can be critical if the insured person’s health has deteriorated or if obtaining new coverage is difficult or costly.
Are there any costs or fees associated with the automatic premium loan provision?
Yes, borrowing through the automatic premium loan provision incurs costs and fees. The insurance company typically charges interest on the loaned amount, which is added to the policy’s outstanding loan balance. The interest rate may vary depending on the policy terms and prevailing market conditions. It’s important to review the policy documentation to understand the specific charges associated with the provision.
Your life insurance quotes are always free.
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Brandon Frady
Licensed Insurance Agent
Brandon Frady has been a licensed insurance agent and insurance office manager since 2018. He has experience in ventures from retail to finance, working positions from cashier to management, but it wasn’t until Brandon started working in the insurance industry that he truly felt at home in his career. In his day-to-day interactions, he aims to live out his business philosophy in how he treats hi...
Licensed Insurance Agent
Editorial Guidelines: We are a free online resource for anyone interested in learning more about life insurance. Our goal is to be an objective, third-party resource for everything life insurance-related. We update our site regularly, and all content is reviewed by life insurance experts.