The automatic premium loan provision is an optional clause of a life insurance policy. What is it? How does it work?
What Is An Automatic Premium Loan Provision?
An automatic premium loan provision is an essential feature of a life insurance policy. It allows an insurer to deduct from a policy’s cash value the premium amount overdue whenever the policyholder forgets to pay the premium.
Using the automatic premium loan provision removes unexpected interruptions in a whole life policy. The policy, therefore, doesn’t trigger the default non-forfeiture feature due to sudden policy discontinuance.
How Does An Automatic Premium Loan Work?
Usually, there are no other obligations that a policy owner must complete when having the automatic premium loan provision active. Once the premium payment can’t be settled within the grace period, the insurer can automatically issue a loan against the policy’s cash value to pay the overdue premium amount.
Consequently, the automatic premium loan provision is designed to minimize the policy’s risk of being lapsed due to delinquent payments. It often appears in a life insurance policy as an optional component.
The policy’s cash value must be sufficient to originate a loan to obtain the automatic premium loan provision. It must be equal to or more than the required premium.
Keep in mind that policy owners don’t need to repay the loan. They can borrow against the generated policy’s cash value without filling out a credit application or holding collateral.
However, the loan functions are similar to any other policy loan. It will accumulate interests as the costs for the privilege of accessing the current cash value instead of paying periodic premiums.
An automatic premium loan provision is an essential feature of a life insurance policy.Source: investopedia
Which Policies Have An Automatic Premium Loan Option?
Typically, you can find an automatic premium loan option available on whole life insurance policies. Meanwhile, universal life policies do not add this kind of loan provision since they always subtract policy’s expenses from its value.
Benefits Of An Automatic Premium Loan
Both the insurance issuer and the policyholder can benefit from an automatic premium loan provision.
Firstly, it enables the insurers to withdraw money from the policy cash value automatically and regularly collect premiums. They, therefore, don’t need to remind the insured parties of the premium payments by a written notice.
Besides, insurance companies may make loans to enjoy tax-free money from the policy.
For the policyholders, the premium loan provision will give them peace of mind, for sure. Of course, she/ he can choose to make regular payments at a scheduled date. However, if he/she misses out on premiums, this feature will ensure the payment takes place. Hence, the policy will still effectuate and maintain its coverage.
Drawbacks Of An Automatic Premium Loan
Similar to other loans, an automatic premium loan carries interest. You have to pay the loan principal and its interest. Not to mention, when a policyholder borrows against the policy’s cash value, there will be an incremental decrease in the current cash value. As a result, the policyholder can gain lower earnings since the current cash value yields interests every year from the insurer’s conservative-yield investments.
Additionally, the premiums can absorb all the policy’s cash value if the insured party continues to take out loans to pay insurance fees. In this case, the policy will terminate, triggering the non-forfeiture feature of the whole life policy.
How To Monitor An Automatic Premium Loan
Usually, the insurance companies will not provide you with a detailed repayment schedule as they don’t require you to fill up the loan balance. Also, there are two main ways the insurers can charge interest on your loans. In detail, you can choose to pay your loan interest out of your pocket or to borrow from the current cash value to pay this charge. Remember that the interest due will be added to the loan balance cumulatively if you borrow the interest.
Hence, you have to request an annual in-force policy illustration to determine the impact of an automatic premium loan provision. This illustration should be a snapshot letting you be aware of:
– The repaid amount of the automatic premium loan provision in-full
– Estimated amounts of the premiums and incurred interests out of pocket
– Estimated amounts in case of borrowing the premiums and interest loans
– The premium required to endow the policy at the mature date
– Estimated earnings to grow your current cash value
– When the current premiums can not feed up the loans and their interest
– What happens if you take a partial withdrawal or add up to the current cash value
How To Add It To Your Policy
Firstly, you need to check which policy you are holding. If you have already signed a whole life insurance policy, you will benefit from an automatic premium loan provision feature.
Then, you check with the insurance issuer whether your automatic premium loan arrangement is utilized or not. If not, you can call and request the insurance companies to activate this kind of loan provision directly over the phone. However, some insurance companies might ask you to fill out a written application to confirm this change. Meanwhile, others allow customers to manage their policies through their online account integrated with a premium loan provision. Therefore, if you want to have this kind of loan provision active, you should check any notes relating to the automatic premium loan (APL) provision feature. You might find and activate the APL feature with a click of a button.
To Sum Up
Adding the automatic premium loan provision is a good idea for your whole life insurance policy. It is an excellent safety set to prevent your policy from being lapsed for unpaid premiums. However, you do make sure to understand its benefits and impacts to enjoy your life insurance coverage at best.
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