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.

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