Automatic Premium Loan Provision
An automatic premium loan provision (APL) is a clause included in some life insurance policies that allows the insurance company to automatically borrow money from the policy’s cash value to pay outstanding premium payments. APLs are most common in cash value life insurance policies, such as whole life insurance.
If a policyholder fails to make a premium payment by the due date, the APL provision will kick in and the insurance company will automatically borrow money from the policy’s cash value to pay the premium. This prevents the policy from lapsing.
The borrowed amount, plus any applicable interest, is then added to the policy’s outstanding loan balance. The policyholder is responsible for repaying the loan, either by making lump-sum payments or by having the interest and loan balance deducted from the policy’s cash value.
APLs offer a number of benefits to policyholders, including:
- Preventing policy lapses: APLs can help to prevent policy lapses due to non-payment of premiums. This can be especially helpful for policyholders who experience unexpected financial difficulties.
- Maintaining coverage: APLs can help policyholders to maintain their coverage even if they are unable to make a premium payment. This can be important for policyholders who have pre-existing medical conditions or who are taking medications that are not covered by their employer’s health insurance plan.
- Flexibility: APLs offer policyholders flexibility in how they repay the loan. Policyholders can make lump-sum payments or have the interest and loan balance deducted from the policy’s cash value.
APLs also have some drawbacks, including:
- Interest charges: Policyholders are charged interest on the loan balance. This can increase the cost of the policy over time.
- Reduced cash value: The loan balance is deducted from the policy’s cash value. This can reduce the amount of money that is available to the policyholder in the future.
- Policy surrender: If the policyholder does not repay the loan, the insurance company may surrender the policy. This means that the policyholder will lose their coverage and will only receive the remaining cash value of the policy.
Overall, APLs can be a valuable tool for policyholders who want to maintain their coverage even if they are unable to make a premium payment. However, it is important to understand the drawbacks of APLs before using them.
Here are some things to consider before using an APL:
- Interest charges: Make sure to understand the interest rate that will be charged on the loan balance. This can vary depending on the insurance company and the policy.
- Reduced cash value: Keep in mind that the loan balance will be deducted from the policy’s cash value. This can reduce the amount of money that is available to you in the future.
- Policy surrender: If you do not repay the loan, the insurance company may surrender the policy. This means that you will lose your coverage and will only receive the remaining cash value of the policy.
If you are considering using an APL, it is important to weigh the benefits and drawbacks carefully. You should also talk to your insurance agent about your specific situation to see if an APL is the right option for you.