What is an automatic premium loan (APL)?
– Definition: An automatic premium loan is a contract clause in certain life-insurance policies that lets the insurer cover a missed premium by drawing the amount from the policy’s accumulated cash value. It is, in effect, a loan against the policy that the company initiates automatically so coverage does not lapse for nonpayment.
Key terms (short definitions)
– Cash value: the accumulated savings component in some permanent life insurance that builds up above the policy’s face (death) amount.
– Policy loan: money borrowed using the policy’s cash value as the source; interest usually applies.
– Lapse: cancellation of the policy for failure to keep required premiums paid.
– Death benefit: the amount paid to beneficiaries when the insured dies.
– Grace period: the extra time after a premium due date during which the insurer accepts payment without cancelling the policy.
How APLs work (step-by-step)
1. You own a permanent, cash-value policy (for example, whole life; some universal life policies may or may not include APL).
2. A premium becomes due and is not paid within the policy’s grace period.
3. If the policy contains an automatic premium loan provision, the insurer uses available cash value to cover the unpaid premium instead of letting the policy lapse.
4. The insurer notifies the policyholder that a loan was taken and records a loan balance.
5. Interest accrues on the outstanding loan balance. If the policyholder never repays the loan and the cash value is exhausted, the policy can lapse.
6. If the insured dies while the loan (and accumulated interest) remains unpaid, the insurer subtracts the loan balance plus interest from the death benefit before paying beneficiaries.
Which policies can have an APL?
– Only permanent life insurance policies that build cash value are candidates for APLs. Whole life policies commonly include the provision. Some universal life (UL) policies may include it, but because UL policies sometimes reduce cash value to cover charges, they don’t always permit automatic premium loans. Policy language varies; some contracts may prohibit loans unless the premium has already been paid in full.
Important points and special considerations
– An APL is still a loan: it creates an outstanding balance that accrues interest.
– Repeated use can deplete the cash value; if cash value reaches zero, the insurer may terminate the policy.
– Any unpaid loan plus interest reduces the amount paid to beneficiaries when the insured dies.
– The exact terms (e.g., whether APL is allowed, the timing when it kicks in, and notification requirements) depend on the policy contract.
Checklist: What to review in your policy
– Does the contract include an automatic premium loan provision? (Check policy riders and definitions.)
– Which policy types are eligible under your contract (whole life, universal life, etc.)?
– Does the policy require the premium to be paid before loans may be made?
– What is the interest rate applied to policy loans, and how is it calculated?
– How long after a missed payment will the APL be activated?
– How will the insurer notify you when an APL is used?
– What happens to the death benefit if a loan (plus interest) remains unpaid?
Worked numeric example (illustrative)
Assumptions:
– Policy cash value today: $10,000
– Monthly premium due: $200
– APL interest rate (illustrative): 6% per year, compounded annually for simplicity
Scenario:
– You miss one monthly premium of $200. The insurer uses APL to cover the $200.
– New loan principal = $200.
– If you never repay and one year passes at 6% interest, loan balance ≈ $200 × 1.06 = $212.
– If later the policy’s cash value declines (for other reasons) to $212 or less and no other money is added, the insurer may cancel the policy. If cancellation occurs while the $212 loan is outstanding, the insurer will subtract $212 from whatever cash or death proceeds remain.
This example is simplified and meant to show mechanics; actual loan interest may be charged differently (monthly vs. annually), and policy accounting rules vary.
Sources for further reading
– Investopedia — Automatic Premium Loan: https://www.investopedia.com/terms/a/automatic-premium-loan.asp
– Insurance Information Institute (III) — What Is Cash Value Life Insurance?: https://www.iii.org/article/what-is-cash-value-life-insurance
– National Association of Insurance Commissioners (NAIC) — Consumer information: https://content.naic.org/consumer.htm
Educational disclaimer
This explainer is for educational purposes only and does not constitute personalized financial, tax, or legal advice. Check your specific policy language and consult a licensed insurance professional or financial advisor for decisions about your coverage.