Automatic Premium Loan

What Is an Automatic Premium Loan, and How Does It Work?

When a premium is due, an automatic premium loan is a feature in an insurance policy that allows the insurer to take the amount of an unpaid premium from the policy's value. Automatic premium loan provisions are most typically seen in cash value life insurance plans, and they allow a policy to remain in existence rather than lapse due to nonpayment of a premium.

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Understanding How an Automatic Premium Loan 

Works To qualify for an automatic premium loan, you must have a cash-value life insurance policy with premiums that increase to the policy's cash value. Life insurance policyholders may be allowed to borrow against the cash value of their policy, depending on the policy language. This cumulative cash value is a sum above and beyond the face value of the policy that the policyholder can draw against at their discretion. It's worth noting that the policy contract may state that no loans can be taken out unless the premium is paid in full.

Background Because the accrued value is essentially the policyholder's property, borrowing against the cash value does not require a credit application, loan collateral, or other conventional loan good faith requirements. The loan is secured against the policy's cash value, and if it is not repaid, the loan sum is removed from the policy's cash value. The policyholder will be responsible for interest on the loan, just like any other borrower.

Both the insurer and the policyholder benefit from automatic premium loan provisions: the insurer can continue to collect periodic premiums without sending reminders to the policyholder, and the policyholder can maintain coverage even if they forget or are unable to send in a check to cover the policy premium.

The policyholder can still pay the premium on time, but if it is not paid within a specified number of days following the grace period, such as 60 days, the remaining premium amount is removed from the policy's cash value. The policy will not lapse as a result of this. The insurer will notify the policyholder of the transaction if the automatic premium loan provision is used.

An automated premium loan is a borrowing against the policy that has an interest rate attached to it. If the policyholder continues to pay the payment in this manner, the cash value of the insurance coverage may be reduced to zero. Because there is nothing left against which to take out a loan, the policy will lapse at this time. If a policy is canceled while there is an outstanding loan, the loan amount, plus any interest, is removed from the policy's cash value before it is terminated.