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What is an automatic premium loan?
An automatic premium loan is often associated with a life insurance policy that has a cash value. It is a specific clause, or rider, within the policy that allows the insurance issuer to withdraw premium payments from the accrued value of the policy when the policyholder is unable to or neglects to continue paying.
When someone holds a cash-value life insurance policy, her premium payments accumulate to add what’s called a “cash surrender value.” The policyholder is able to borrow against it, and many life insurance policies have a clause stating that the insurance company can also automatically borrow against it in the case of a delinquent payment.
Automatic premium loan clauses are often an optional component to a life insurance policy. It gives the insurer the right to make this automatic payment based on the current cash value of the policy at the end of the specified grace period. The benefit of this clause is to minimize the risk that the insurance policy will lapse because of the nonpayment of the premium.
The automatic premium loan also does not affect the face value of the policy — what it’s worth when redeemed — but it does accrue interest just like any other loan. The policyholder will still have to pay back the full amount of the loan plus interest, and the amount will be deducted from the payout if the policyholder dies before paying off what she owes.
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Automatic premium loan example
Within Joe’s life insurance policy, the automatic premium loan clause gives his insurer the ability to remove the $500 annual premium from the built-up cash value of the policy. Joe forgot to make his payment on time, but this clause helped to cover the cost of the premium by reducing the cash value of the plan. In this way, Joe’s policy did not lapse, and continues to provide him with protection.