insurance

Automatic Premium Loan

A feature in permanent life insurance policies that automatically borrows from the policy's cash value to pay overdue premiums, preventing the policy from lapsing. This keeps the coverage in force when the policyholder fails to make premium payments.

Example

“When Robert forgot to pay his life insurance premium for three months, the automatic premium loan provision kicked in, borrowing $900 from his policy's cash value to keep his coverage active.”

Memory Tip

Automatic Premium Loan = 'APL like APPLE' - it's the core feature that keeps your life insurance tree from dying when you forget to water it with premium payments.

Why It Matters

This feature prevents accidental policy lapses that could leave your beneficiaries without coverage, especially important for older policies with substantial cash value. It provides a safety net during financial hardship but reduces your policy's cash value and death benefit if not repaid.

Common Misconception

Policyholders often think automatic premium loans are free money or gifts from the insurance company. In reality, these are actual loans that accrue interest and reduce both the cash value and death benefit. If not managed properly, accumulated loans can eventually cause the policy to lapse entirely.

In Practice

Susan has a whole life policy with $50,000 cash value and annual premiums of $2,400. During a job loss, she misses six months of payments totaling $1,200. The automatic premium loan feature borrows $1,200 from her cash value at 5% annual interest. Her cash value drops to $48,800, and her $200,000 death benefit is reduced to $198,800. If Susan doesn't repay the loan, it will continue growing with interest, further reducing her benefits over time.

Etymology

Combines 'automatic' (from Greek 'automatos' meaning self-acting) with 'premium loan,' developed by insurance companies in the early 20th century to reduce policy lapses and protect policyholders' investments.

Common Misspellings

automatic premiem loanautomatic premium loneautomattic premium loanautomatic primium loan

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