An automatic premium loan provision is a provision in a life insurance policy that allows the insurer to automatically deduct the overdue premium amount from the policy’s value whenever the policyholder is unable – or sometimes neglects – to pay the amount of the premium.
L&H are companies that cover the risk of loss of life and medical expenses caused by illness or injury. The customer pays an insurance premium for the coverage, provided that the cash value is greater than or equal to the premium amount due.
Obtaining an automatic premium loan
When a policyholder purchases cash value life insurance, the premium payments are added to a cash value. Since the accumulated cash belongs to the policyholders, there is no need to submit a credit application or loan guarantee.
It is used to obtain a loan, acting as a protection against potential losses for the lender in the event of default by the borrower to borrow against the cash value policy.
An automatic premium loan provision is usually an optional feature of life insurance policies. The clause minimizes the risk that an insurance policy will lapse due to neglected payments. The face value of the policy is not affected by the automatic premium loan. However, it accrues interest similar to other loans.
Benefits of a Premium Auto Loan
Providing an automatic premium loan benefits both the policyholder and the policyholder. The insurer does not need to send multiple notices to policyholders for premium payment. In addition, policyholders can continue their coverage even if they miss paying premiums.
However, if he fails to pay the premiums, the insurance companies will deduct the premium amounts from their policy’s cash value. Thus, the life insurance policy is prevented from lapsing. The insurance issuers inform the policyholders in recourse to the automatic premium loan agreement.
Disadvantages of a premium automatic loan
Like any other standard loan, an auto premium loan bears interest. Therefore, the policyholder has to repay the loan amount and the interest amount. Additionally, when a policyholder borrows against the policy’s cash value, the 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 the life of the life insurance component can reduce.
The cash value can then be reduced to zero if the policyholder takes out loans to pay the insurance premiums. In such a case, the policy terminates, as there is no remaining value against which a loan can be taken out.
Practical example
Suppose you purchase a life insurance policy, and the automatic premium loan provision clause offers your insurance issuer the option of deducting $600 from the accumulated cash value of your policy. Suppose you forgot to make a premium payment when due.
According to the automatic premium plan clause, your insurer will reduce the cash value, which will cover the premium amount. This way, your policy will not be terminated due to the missed payment and will continue as normal.
Summary
- An automatic premium loan is a feature of cash value life insurance policies; therefore, policyholders must purchase such policies to obtain automatic premium loans.
- The cash value of a policy is added to the face value of the policy. A life insurance policyholder can take out a loan against the surrender value of his policy.
- Automatic premium loans can only be borrowed if the policy’s cash value is equal to or greater than the amount of the overdue premium.