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There are many different riders, provisions and features that can be added to permanent insurance policies. The automatic premium loan (APL) provision is one of the lesser known, but extremely valuable, provisions available to whole life policyholders. This provision protects policyholders from having their policy lapse due to a missed or delayed premium payment. In this article we’ll cover exactly what an APL provision is, how it works, which policies can qualify and what policyholders need to know.
An Automatic Premium Loan (APL) Provision allows an insurance company to take a loan from the policy’s cash value to cover unpaid premium. This provision helps to prevent an unintentional policy lapse.
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When a premium payment is overdue, the APL provision allows the insurance company to initiate an internal loan to cover the premium. Most insurance companies give a 30-day grace period for premium payments. The APL provision would not be activated until the grace period for premium payment expires.
When a policy has an APL provision and the policyholder misses a premium payment, the insurance company automatically pays the premium by taking a loan from the policy’s cash value for the premium due. Since the automatic premium loan provision is a feature which is set up before it is utilized, the policyholder will not have to sign for the automatic loan, and the loan funds will be handled internally by the insurance company to pay the premium due.
The automatic premium loan provision is valuable for policyholders who want their coverage to continue even if they miss premium notices, and there is no cost to add the provision to a policy.
Activating this provision on a policy gives policyholders extra security, when it comes to premium payments, and added peace of mind. The APL provision has been a lifesaver for some of our clients in situations where premium notices have been delayed in the mail, or when they moved, but an address change was not yet completed.
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Automatic premium loans offer significant advantages and disadvantages to both insurers and policyholders. On the plus side, these loans provide convenience for insurers by ensuring regular and automatic premium collection, eliminating the need for multiple payment reminders. Policyholders benefit from continued coverage, even when they miss premium payments, as the automatic premium loan clause kicks in when payments are overdue. This feature is especially helpful during financial hardships, as it prevents policies from lapsing due to non-payment. However, the drawbacks are notable.
These loans, like standard loans, accrue interest, meaning policyholders must repay both the loan amount and the interest, which can add to their financial burden. Additionally, borrowing against a policy’s cash value can reduce the life insurance death benefit, potentially impacting the financial planning for beneficiaries. The most significant risk is the potential termination of the policy. If policyholders continuously rely on loans to pay premiums, they may deplete the policy’s cash value to zero. When no value is left, no further loans can be taken, leading to policy termination.
Whole life policies that have a cash value (money that can be borrowed without surrendering the policy) can qualify for an automatic premium loan provision. Policyholders can add (or remove) this provision from a qualifying whole life policy at any time.
An automatic premium loan provision only applies to whole life insurance policies. Universal life policies do not have an APL provision because premiums are flexible and policy expenses are always deducted from available cash value. Term life insurance policies do not have this provision either because most term policies don’t build cash value.
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At McFie Insurance, we add the Automatic Premium Loan (APL) provision to all whole life policies we sell. There is no cost to add the provision to a policy and there have been many instances where this provision has kept a policy from lapsing. The APL provision can only be activated by the insurance company if the premium is overdue, and the policy has sufficient cash value to cover the amount of premium due.
Anytime the APL provision is utilized, the amount of cash used by the provision is marked as “outstanding loan balance” and subject to the insurance company’s current loan interest rate. Policyholders can make payments to, or completely pay off, the outstanding loan balance anytime during the year. Loan payments are credited back to the policy’s cash value, replenishing the amount available for you, the policyholder, to borrow or for the insurance company to access via the APL provision if you miss premiums in future years.
by Gracine McFie
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