Automatic Premium Loan

An automatic premium loan (APL) is a provision in an insurance policy that allows the insurer to deduct the amount of an outstanding premium from the policy's value when the premium is due.

Automatic premium loan provisions are most commonly associated with cash value life insurance policies, such as whole life insurance, and allow a policy to remain in force rather than lapse due to nonpayment of the premium.

Understanding Automatic Premium Loans

To qualify for an automatic premium loan, you must have a cash-value life insurance policy in which every premium paid adds to the policy's cash value. Life insurance policyholders may be able to borrow against the cash value of their policy, depending on the policy language. This accrued cash value is a value in addition to the face value of the policy that the policyholder can borrow against at their discretion.

An automatic premium loan is essentially a loan taken out against the policy that has an interest rate attached to it. If the policyholder continues to pay the premium in this manner, the cash value of the insurance policy may reach zero.

The policy will lapse at this point because there is nothing left to borrow against. If the policy is canceled while there is an outstanding loan, the loan amount plus any interest is deducted from the policy's cash value before it is closed.

Special Considerations

Because the accrued value is technically the policyholder's property, borrowing against the cash value does not necessitate a credit application, loan collateral, or other good faith requirements common in loans. The loan is made against the cash value of the policy, and if it is not repaid, the loan balance is deducted from the cash value of the policy. The policyholder will have to pay interest on the loan, just like any other loan.

Automatic premium loan provisions benefit both the insurer and the policyholder: the insurer can continue to collect periodic premiums without sending reminders to the policyholder, and the policyholder can keep coverage even if they forget or are unable to send in a check to cover the policy premium.

The policyholder can still pay the premium on the regularly scheduled due date, but if it 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 keeps the policy from expiring. The insurer will notify the policyholder of the transaction if the automatic premium loan provision is used.

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

Automatic premium loans are only available on permanent policies with a cash-value component. Whole life policies and some universal life (UL) policies fall into this category. Universal life policies do not always allow ALP because they deduct expenses from the cash value.

What Is the Automatic Premium Loan Provision Designed to Do?

Automatic premium loans are intended to keep life insurance coverage in force even if the policyholder has failed to pay the required premiums on time. Perhaps the policyholder is unable to pay due to financial or other difficulties, or perhaps he or she simply forgot. In any case, the APL provision allows the death benefit to continue even in such cases.

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

Potentially. If the insured dies before repaying any outstanding loans, the death benefit amount will be reduced by the amount of interest owed.