What is an Automatic Premium Loan?
An automatic premium loan is a provision in a life insurance policy that allows the insurer to automatically deduct the premium amount overdue from the policy value whenever the policyholder is unable – or neglects – to pay the premium. The insurance issuer Life and Health Insurers Life and health (L&H) insurers are companies that provide coverage on the risk of loss of life and medical expenses incurred from illness or injuries. The customer – the purchaser of the insurance policy – pays an insurance premium for the coverage. makes a loan against the policy’s cash value for paying the overdue premiums provided the cash value is more than or equal to the premium amount due.
- An automatic premium loan is a feature of cash-value life insurance policies; hence, policyholders need to take out such policies to be able to obtain automatic premium loans.
- The cash value of a policy is in addition to the face value of the policy. A life insurance policyholder may take a loan against his/her policy’s cash value.
- Automatic premium loans can be borrowed only if the policy’s cash value is equal to or more than the overdue premium amount.
Obtaining an Automatic Premium Loan
When a policyholder takes out life insurance with cash value, the premium payments add to what is known as a cash surrender value. As the accumulated cash belongs to the policyholders, there is no need for a credit application or loan collateral Collateral Collateral is an asset or property that an individual or entity offers to a lender as security for a loan. It is used as a way to obtain a loan, acting as a protection against potential loss for the lender should the borrower default in his payments. for borrowing against the cash value policy. The policyholder can borrow against the cash surrender value, and life insurance policies may include a clause according to which the insurance companies can automatically deduct premium amounts from the cash value in the event of non-payment of the premium.
The clause minimizes the risk of an insurance policy becoming lapsed due to neglected payments. The policy’s face value is not affected by the automatic premium loan. However, it accumulates interest similar to other loans.
In the event of the death of the policyholder before he/she pays the automatic premium loan or due to any other reason if the policy with an outstanding loan gets canceled, the full loan amount and interest will be subtracted from the insurance payout.
Assume that you take out a life insurance policy, and the automatic premium loan clause provides your insurance issuer with an option to deduct $600 from the accumulated cash value of your policy. Suppose that you forgot to make a premium payment on the scheduled date.
According to the clause of the automatic premium plan, your insurer will reduce the cash value, which will cover the premium amount. Thus, your policy will not terminate due to the missed payment and will continue as normal.
Benefits of an Automatic Premium Loan
The provision of an automatic premium loan benefits both the insurance issuer and the policyholder. The insurer can collect premiums regularly and automatically. They do not need to send multiple notices to the policyholders for payment of premiums.
In addition, the policyholders can continue their coverage even if they miss out on premium payments. The automatic premium loan clause is exercised when the premium payments are overdue.
The policyholder can choose a scheduled date for regular payments of insurance premiums. However, if he/she does not pay the premiums – even within the grace period – the insurance companies will then deduct the premium amounts from the cash value of his/her policy. Thus, the life insurance policy is prevented from being lapsed. The insurance issuers inform the policyholders in case the automatic premium loan arrangement is utilized.
Drawbacks of an Automatic Premium Loan
Similar to any other standard loan, an automatic premium loan carries an interest. Therefore, the policyholder has to pay back the amount of the loan and the interest amount as well. Also, when a policyholder borrows against the policy’s cash value, the death benefit Accidental Death Benefit Accidental death benefit is a type of insurance policy that pays in the event of the accidental death of an insured person. It is different from life from the life insurance component may reduce.
The cash value may subsequently reduce to zero if the policyholder continues to take loans to pay insurance premiums. In such a case, the policy terminates, as there is no value left against which a loan can be taken.
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