What is 'Automatic Premium Loan'

Automatic premium loan is an insurance policy provision that allows the insurer to deduct the amount of the outstanding premium from the value of the policy when the premium is due. Automatic premium loan provisions are most commonly associated with life insurance policies and allow the policy to continue to be in force rather than lapsing.

BREAKING DOWN 'Automatic Premium Loan'

Depending on the policy language, life insurance policyholders may be able to take out a loan against the cash value of the policy. With such a policy, every premium you pay adds to the cash value of the 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 his or her discretion. Since 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. The policy contract’s language may indicate that no loans may be taken out unless the premium has been paid in full.

How Automatic Premium Loans Work

Automatic premium loan provisions help the insurer continue to automatically collect periodic premiums rather than sending reminders to the policyholder. They also help the policyholder maintain coverage in case he or she forgets to send in a check to cover the policy premium. The policyholder may still choose to pay the premium by the regular schedule 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 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.

The automatic premium loan is 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 to take out a loan against. 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.

RELATED TERMS
  1. Premium Balance

    Premium Balance is the amount of premium that is owed to an insurer ...
  2. Developed Premium

    A premium based on estimates of a policyholder’s risk profile ...
  3. Advance Premium

    An advance premium is an initial premium paid to bind an insurance ...
  4. Net Premium

    Net premium is the expected present value of a policy’s benefits ...
  5. Participating Policy

    A participating policy is insurance that pays dividends to policyholders. ...
  6. Annual Dividend (Insurance)

    In the insurance industry, an annual dividend is a yearly payment ...
Related Articles
  1. Insurance

    Understanding Taxes on Life Insurance Premiums

    Learn about the tax implications of life insurance premiums, including when they might be taxable and whether they are tax deductible.
  2. Financial Advisor

    Understanding Life Insurance Premiums

    When buying permanent life insurance, what amount of premium should you pay for the coverage?
  3. Insurance

    Should You Borrow From Your Life Insurance?

    A loan against the cash value of your life insurance isn't the best way to raise money – but sometimes it's the best choice you have. How to decide.
  4. Insurance

    Borrowing Against a Life Insurance Policy

    There are advantages and disadvantages to taking out a loan against your permanent life insurance.
  5. Retirement

    Beware the Sneaky Math of Universal Life Insurance

    Universal life insurance's cash value can be a cash cow – if there's any left. Read on to see if it'll work as an income source after you've retired.
  6. Managing Wealth

    Mistakes to Avoid When You Own Life Insurance

    How to avoid some common mistakes that can cause tax and inheritance problems when you own life insurance.
  7. Insurance

    How Cash Value Builds in a Life Insurance Policy

    If you have permanent life insurance, more of your insurance premium goes to cash value in the early years of your policy.
  8. Insurance

    Cashing in Your Life Insurance Policy

    Tough times call for desperate measures, but is raiding your life insurance policy even worth considering?
  9. Financial Advisor

    Pros and Cons of Indexed Universal Life Insurance

    Indexed universal life insurance has its pros and cons. Here's what you need to consider before purchasing a policy.
RELATED FAQS
  1. What are the pros and cons of life insurance policy loans?

    Find out the pros and cons of borrowing against your life insurance policy to help you decide if this loan type is the right ... Read Answer >>
Hot Definitions
  1. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  2. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  3. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  4. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  5. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
  6. Hedge Fund

    A hedge fund is an aggressively managed portfolio of investments that uses leveraged, long, short and derivative positions.
Trading Center