Automatic Premium Loan
What is 'Automatic Premium Loan'
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 allows the policy to continue to be in force rather than lapsing.
BREAKING DOWN 'Automatic Premium Loan'
Automatic premium loan provisions help the insurer continue to automatically collect periodic premiums rather than sending reminders to the policyholder, and help the policyholder maintain coverage in the case that 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.
Depending on the policy language, life insurance policyholders may be able to take out a loan against the policy. The loan is taken out by borrowing against the cash value of the policy, with the loan balance deducted from the policy’s cash value if the loan is 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.
The automatic premium loan is a loan taken out against the policy, and does carry with it a specific 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.