What is an automatic premium loan provision?

Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states.
After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in…

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Written by

Rachael Brennan

Licensed Insurance Agent

Benjamin Carr was a licensed insurance agent in Georgia and has two years’ experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.

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Reviewed by

Benji Carr

Former Licensed Life Insurance Agent

UPDATED: Feb 9, 2022

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Quick Facts

An automatic premium loan provision is a clause included in some cash value life insurance policies that allows the insurance company to deduct the premium from the policy’s cash value if the policyholder doesn’t make a payment
The automatic premium loan provision is designed to prevent a policy from lapsing due to nonpayment
If you take advantage of an automatic premium loan, you must either repay the loan or have it withdrawn from your death benefit before the company pays your beneficiaries

What is an automatic premium loan provision?

An automatic premium loan provision is an aspect of a life insurance policy that allows the life insurance company to automatically withdraw the premium amount from the value of the policy to prevent the policy from lapsing due to nonpayment. There is generally an automatic premium loan provision grace period — such as 60 days — before the premiums are deducted from the value of the policy.

In general, automatic premium loan provisions are included in life insurance policies with a cash value. Cash value life insurance is a type of permanent life insurance that includes cash value savings, which the policyholder can use either as a loan or to pay premiums.

Therefore, any cash value life insurance policyholder can choose to pay their premiums with the cash value from their policy. However, an automatic premium loan provision is helpful in situations where the policyholder either can’t contact — or chooses not to notify — the life insurance company, because the insurance company has the authority to withdraw the premiums from the cash value each time without approval.

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How does an automatic premium loan provision work?

As mentioned above, an automatic premium loan provision is added to a cash value life insurance policy. The premiums that you pay for a cash value life insurance policy go toward the cash value. Some policies will also allow you to pay as much or as little as you would like to contribute toward the cash value of the policy.

The cash value is above and beyond the face value of the amount. Therefore, if you buy a policy with a $250,000 death benefit, that is the nominal value of the amount, but you can also contribute to a cash value account in addition to the death benefit amount.

Policyholders can elect to borrow against the cash value of the policy, withdrawing it to use for large purchases and necessary expenses. However, the amount that they borrow (plus interest) must be repaid; otherwise, it will be deducted from the death benefit amount when the policyholder passes away.

However, if the premiums remain unpaid, then the policyholder may not be able to borrow against the cash value. And the policy may even lapse, causing them to lose coverage. Therefore, if a policy includes an automatic premium loan provision, the life insurance company has the ability to withdraw the premium from the cash value to cover the policy and prevent it from lapsing.

With that being said, the policyholder must pay back any premiums that are withdrawn from the cash value using the automatic premium loan. If they don’t, it works the same as any other cash value loan which would need to be repaid using the death benefit upon their death.

What is an example of an automatic premium loan provision?

Suppose that Sue has a cash value life insurance policy with an automatic premium loan provision. Her monthly premium is $40 per month, which is comparable to some of the average rates for whole life insurance listed below:

We’ll also show you the average whole life insurance rates for males:

Suppose Sue experiences some unexpected expenses for her home, and she has difficulty making the payments on her life insurance for a few months. During the months that she is unable to meet her premium payments, the insurance company withdraws the premiums from the cash value of her policy to ensure that the policy doesn’t lapse.

After a few months, Sue begins making her premium payments again. And she also starts slowing repaying the loan that was used with the policy loan provision to cover her policy when she couldn’t. (If she didn’t finish paying back the loan before her death, the insurance company would withdraw it from the death benefit before paying her beneficiaries.)

Should I buy life insurance with an automatic premium loan provision?

Overall, an automatic premium loan provision may be a good clause to have included in your life insurance policy. If you ever run into financial difficulties and are unable to make your premium payments, the automatic premium loan provision could save you from a lapsed policy.

In addition, taking a loan out against your policy is easy and more affordable than other loans. You won’t need to endure a credit approval process, and the interest rates are typically lower than those of traditional loans. You also won’t be expected to pay it back by a certain date or within a certain number of payments. However, keep in mind that the loan will continue to grow interest if you let it sit.

If you would like to purchase a cash value life insurance policy with an automatic premium loan provision, enter your ZIP code into our free quote comparison tool below to find affordable life insurance near you.