Can you explain the ‘automatic premium loan’ clause?

UPDATED: Apr 15, 2013

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Asked April 15, 2013

1 Answer

The automatic premium loan clause is a clause that is commonly found in cash value life insurance policies. Basically, the clause means that the insurance company can deduct premium payments from the accrued cash value if you should be late on your premium payments. In the event of a missed payment, or delinquent payment, the company will make an automatic payment using the money you've accumulated as cash value. That may sound complicated, but it's really a simple term to explain.

With cash-value policies, every premium you pay adds a certain amount to the built-up cash value. This accrued cash value is a value over and above the face value of the policy and can be borrowed against by the policyholder at their discretion. Since the accrued value is technically the property of the policyholder anyway, borrowing against that amount does not require a credit application, loan collateral, or other good faith requirements typically found in loans.

To help you maintain your life insurance policy even during tough financial times, many insurance companies include an automatic loan clause. What this means is that, if you miss a premium or fail to make a payment on time, the insurance company is automatically authorized to take out a loan against the accrued value to cover the payment of the premium. When the premiums are overdue beyond the grace period, the insurance company then borrows the premium payment from the cash value, keeping your coverage valid and paid up to date.

Loans taken out against a life insurance policy do not affect the face value of the policy. If there is not sufficient accumulated cash value, the insurance company will not borrow against the face value of the policy, but will, instead, notify you that the policy is about to lapse.

If sufficient funds are available, the loan is automatic and behaves much the same as a loan from any lender. Interest is charged against the loan, just as it would be in a regular loan, and it is the responsibility of the policyholder to pay back the loan plus any interest charges. If the policy is canceled with an outstanding loan, the amount of the loan plus any interest is deducted from the remaining cash value before it is closed. If you die before the loan is repaid, the loan amount plus interest is deducted out of the death benefit coverage payout before the policy is settled.

Answered April 15, 2013 by Anonymous

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