General Insurance

Automatic Premium Loan Provision

This article was Last Updated on January 20, 2022 by Olushola Awode

In the World of Finance, there has been a huge change. This change necessitates the measures being put in place to ensure that finances are easily managed according to the citizen’s state of income with also provisions for future expenditures not foreseen as regulated by a legal policy.

What is an automatic premium loan provision? An automatic Premium loan provision is one of these insurance policies that encourage a continuance of an insurance policy.

Read further to understand this policy and how it works.

What is An Automatic Premium Loan Provision?

Well, in very simple terms, an automatic premium loan is a policy provision that authorizes the insured to withdraw the amount of an outstanding dividend from the value of the policy as at when due.

In this case, the dividend, which can also be referred to as premium, is an amount that the insured pays for the purchase of such a policy.

Automatic premium loan provisions are often correlated with cash value life insurance policies. Cash-value life insurance is a form of insurance policy that lasts for a lifetime and allows the insured to have a cash value of savings that they can use as a source of loans and premium repayment.

How To Obtain An Automatic Premium Loan

This type of loan provision is a clause; a part of whole life insurance, that states that if the insurer fails to meet up with the due repayment of premium, money from the cash value savings which has been complied, can be withdrawn and used as a loan to pay up the due premium.

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Therefore, one cannot obtain an automatic premium loan without a life insurance policy. This is because there is a needed cash value for which each premium paid by the insurer adds value to.

However, taking such loans from these policies depends largely on the policy language. Some policies encourage the taking of loans against the cash value of a policyholder at their choice.

Life insurance policyholders may be allowed to borrow against the cash value of their policy depending on the policy language. However, it is important to note that the policy contract’s language may imply that no loans may be taken out except in some cases unless the premium has been reimbursed in full.

When taking out a loan, there is no need for a credit application as the accumulated cash value is originally the insurer’s property; there is also no need for loan collateral and every other requirement that a typical loan needs.

The policyholder would owe a stipulated amount of loan interest as is with a standard loan.

Benefits of an Automatic Premium Loan Provision

Automatic Premium Loan Provision
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An automatic premium loan provision benefits both the insurer and the insured; this policy allows for the insurer to collect premium payments from the cash value of the insured when they cannot pay up.

On the part of the insured, an automatic premium loan helps them to keep their policy active rather than losing it due to a missed payment. That is, it allows a policy to continue to be in force rather than lapsing due to non-payment of the premium.

This is beneficial to an insured because there are many reasons why a payment could be missed, such as health issues, low funds, or even the simple case of forgetting.

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But then, this automatic loan covers cases like those mentioned above. The policyholder, however, can decide the due date for periodic payments of insurance premiums.

Regardless, if he/she does not reimburse the premiums – even within the grace period – The insurance provider then deducts the premiums from the cash value of his/her coverage. As a result, the life insurance policy is prevented from lapsing. The insured then informs the policyholders if the automatic premium loan provision is used.

Another advantage is that the insurer does not have to convey numerous notices to the policyholders for payment of premiums.

Demerits of an Automatic Premium Loan

Because this is a loan taken out from an insurance policy that has interest attached to it, in a case where a policyholder continues to use this medium for repayment of premium, there is a possible scenario of the cash value of the insurance policy attaining zero.

When this happens, the policy lapses because there would be nothing left to borrow a loan from.

Moreover, when a policyholder borrows against the policy’s cash value, the death benefit from the life insurance segment tends to decrease.

In cases of an outstanding loan, money borrowed plus the interest would then be withdrawn from the cash value policy before it is closed down.

Where is an Automatic Premium Loan Found?

The automatic premium loan is accessible on whole life insurance policies. Because universal life insurance will often deduct policy payments from the ready cash value, they do not have an automatic premium loan component.

How does a Grace period work in an automatic premium loan policy?

The grace period allows for a precise designated amount of time in which the policyholder is expected to make the appropriate premium payments after the specified due date.

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However, if the policy owner neglects to make the premium payments, the insurance company will not instantly cancel the policy. This is when the insurer then takes out the automatic loan to pay up the premium.

It is important to state that the grace interval for policies where the premium payment method is monthly is 15 days from the due date.  The grace interval for policies where the premium payment method is quarterly, half-yearly, or yearly is one month but not less than 30 days.

Conclusion

An automatic premium loan provision as stated in this article is an automatic policy loan taken out from an insurance policy to pay up premium payment when the insured cannot meet up. These policies can only be obtained in cases of a whole life insurance policy. This provision was made to prevent an inadvertent relapse of policy and keep both the insurer and the insured in business.

We hope you find this article on automatic premium loan provision helpful.

Kindly check our last article on The type of Life Insurance Policy Generates Immediate Cash Value

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