What Is an Automatic Premium Loan?

What Is an Automatic Premium Loan?

Let me explain what an automatic premium loan, or APL, really is. It's a provision in your insurance policy that lets the insurer pull the amount of an unpaid premium directly from the policy's value when it's due. You see this most often in cash value life insurance policies like whole life, and it keeps your policy active instead of letting it lapse because you missed a payment.

Key Takeaways on Automatic Premium Loans

Here's what you need to grasp: These loans let you apply the cash value from your permanent life insurance policy to cover any overdue premiums. As the name suggests, this happens automatically once your payments are overdue by a set period. The main goal is to stop your policy from lapsing, which would end your coverage. Remember, it's set up as a loan against the policy, so you'll have to pay interest on it. And it's only possible if your policy's cash value is at least as much as the overdue premium.

Understanding Automatic Premium Loans

To use an automatic premium loan, you must have a cash-value life insurance policy where each premium you pay builds up the policy's cash value. Based on the policy terms, you as the policyholder might be able to borrow against that cash value whenever you want. An APL is basically a loan against the policy, and it does come with an interest rate. If you keep relying on this to pay premiums, your policy's cash value could drop to zero. At that stage, the policy lapses because there's nothing left to borrow against. If the policy gets canceled with a loan still outstanding, the loan amount plus interest gets subtracted from the cash value before everything closes out.

Keep in mind that the policy contract might state no loans can be taken unless the premium is fully paid.

Special Considerations

Since the cash value belongs to you as the policyholder, borrowing against it doesn't involve credit checks, collateral, or the usual loan requirements. The loan comes from the policy's cash value, and if you don't repay it, the balance gets deducted from that value. You'll still owe interest, just like any standard loan.

This provision benefits both sides: The insurer keeps collecting premiums automatically without chasing you with reminders, and you maintain your coverage even if you forget or can't pay on time. You can still pay the premium by the due date if you choose, but if it's not paid within, say, 60 days after the grace period, the amount gets deducted from the cash value to avoid lapse. If this happens, the insurer will notify you about it.

Don't forget, an APL is still a loan, so it carries an interest rate.

What Kinds of Life Insurance Policies Are Eligible?

Automatic premium loans are only for permanent policies with a cash-value component, like whole life or some universal life policies. Universal life policies sometimes don't allow APL because they deduct expenses from the cash value.

What Is the Automatic Premium Loan Provision Designed to Do?

It's designed to keep your life insurance coverage going even if you miss premium payments, whether due to financial issues, forgetfulness, or anything else. This way, the death benefit stays in place.

Does an Automatic Premium Loan Decrease the Death Benefit?

It can. If there are outstanding loans and interest when the insured dies, those get deducted from the death benefit before payout.