What is an Automatic Premium Loan?

An Automatic Premium Loan (APL) is a provision in some life insurance policies that allows the insurer to use the policy’s cash value to pay missed premiums automatically. This feature is particularly common in whole life and universal life insurance policies.

Here’s how it works: if you fail to make a premium payment by the due date, and after the grace period has expired, the insurer will automatically take out a loan against the policy’s cash value to cover the missed premium. This ensures that your life insurance coverage remains active without interruption.

How Does an Automatic Premium Loan Work?

The process of an APL is triggered when you fail to pay your premium by the due date. Here’s a step-by-step breakdown:

Triggering Event

If you miss a premium payment and do not make it within the specified grace period, which is usually 30 or 60 days depending on the policy, the insurer will initiate an APL.

Loan Creation Process

The insurer uses the available cash value of your life insurance policy to cover the missed premium. This means that instead of lapsing your policy, the insurer borrows from your own accumulated funds within the policy.

Interest Accrual

The loan amount accrues interest over time, which must be repaid along with the principal amount borrowed. It’s important to understand that this interest can impact both the cash value and death benefit of your policy if not managed properly.

Example Scenario

Let’s consider an example: John has a whole life insurance policy with a significant cash value built up over years. One month, due to unexpected expenses, John misses his premium payment. After the grace period expires, his insurer automatically takes out an APL using his policy’s cash value to cover the missed premium. This keeps John’s life insurance coverage active without any lapse.

Eligibility Criteria and Requirements

For an APL to be activated, two main conditions must be met:

1. Sufficient Cash Value: The policy must have enough accumulated cash value to cover the missed premium.

2. APL Provision: The life insurance policy must include an APL provision.

Typically, whole life and universal life insurance policies are eligible for APLs because they build up cash value over time.

Benefits of Automatic Premium Loans

APLs offer several benefits that make them valuable for policyholders:

• Prevent Policy Lapse: By automatically covering missed premiums, APLs ensure that your life insurance coverage remains in force even during financial difficulties.

• Financial Flexibility: APLs provide financial flexibility by allowing you to manage temporary financial setbacks without losing your insurance coverage.

These benefits are particularly important for maintaining continuous protection for your loved ones.

Drawbacks of Automatic Premium Loans

While APLs are beneficial, they also come with some drawbacks:

• Decrease in Cash Value: When an APL is taken out, it reduces the available cash value of your policy.

• Impact on Death Benefit: If the loan balance is not repaid, it can reduce the death benefit payable to your beneficiaries.

It’s crucial to understand these implications to manage your policy effectively.

Special Considerations

When dealing with APLs, there are a few special considerations to keep in mind:

• Interest Rate: Understand the interest rate applied to the loan as it can significantly impact the overall cost.

• Repayment Terms: Regularly review your policy and plan for repaying the loan to avoid long-term financial implications.

What Happens If a Premium is Missed Without an APL Feature?

If you miss a premium payment without having an APL provision in your policy, serious consequences can follow:

• Policy Lapse: Your life insurance coverage could lapse, leaving you and your loved ones unprotected.

• Loss of Coverage: You might lose all benefits associated with the policy if it lapses due to non-payment.