The automatic premium loan provision (APL) is an optional feature of a whole life insurance contract to pay the premium due with a policy loan when the policyholder does not pay the premium. Using the premium loan feature on a whole life policy ensures that the policy remains in force and does not trigger the default non-forfeiture benefit that can dramatically alter the policy.
What Types of Policies have an Automatic Premium Loan Option?
The automatic premium loan is available on whole life insurance policies. Because universal life policies will always deduct policy expenses from available cash value, they do not have an automatic premium loan feature. Whole life insurance policies will never automatically take policy cash values to pay the premium due, so the APL feature is the way to effectively accomplish this goal.
Electing this feature provides peace of mind for the policyholder. Should he/she forget to pay the premium, or have some circumstance come up that prevents payment of the premium when due, the premium loan feature will take care of ensuring the premium payment takes place and the policy remains in force.
How the Automatic Premium Loan Works
When the policy owner elects the premium loan provision, there are no other tasks he/she must complete to use the feature. Once the grace period of the premium payment expires (31 days in most states, 60 days in New York State), the insurance company will automatically issue a loan against the whole life policy's cash value to pay the premium due.
The loan functions just like any other policy loan. It will accumulate interest per the loan provisions of the policy. If the contract uses direct recognition, a dividend adjustment will apply to the cash value pledged as collateral for the loan. If the whole life contract uses non-direct recognition, no adjustment applies.
The policyholder is free to repay the premium loan whenever he/she sees fit. There is no set repayment schedule for the premium loan, just like any other life insurance policy loan.
It's important the understand that the premium loan can only take place if your whole life policy has sufficient cash value to originate a loan. If the cash value of your policy is less than the premium due, the automatic premium loan feature will not happen, even if you have it active.
How to Know if the APL is Active on your Policy
If you have a current whole life policy and you want to know if your policy have the automatic premium loan provision active, there are two very simply ways to ensure that it is.
First, you can log into your online account access and check for any notes concerning the premium loan feature. You might find the APL shorthand, which stands for Automatic Premium Loan with a yes or no flag/check box.
Second, you can always call the insurance company's customer service phone number and ask the rep if your policy has the premium loan provision active.
How to Add the Premium Loan Feature to your Policy
If you determine that the automatic premium loan is not currently active on your whole life policy, you can usually call and request it over the phone. Some companies might make you fill out paperwork to make this change.
You can elect the APL feature at policy issue. Within the life insurance contract, there is a section to request the automatic premium loan. There was a time when this feature defaulted as an active feature, but in more recent years the default option is no. So you should make extra sure that the feature is active when buying a new whole life policy.
What Happens if I don't have the Premium Loan Feature Active?
If your whole life policy does not have the premium loan feature active, and you go beyond your premium due grace period, you will activate your policies non-forfeiture benefit. For the vast majority of whole life policies, the extended term life insurance option will be the default non-forfeiture benefit. This means that you will not automatically lose your death benefit coverage, but it does mean a dramatic (and often permanent) change will occur to your whole life policy.
In rare cases, the non-forfeiture benefit will be a surrender of the policy for its cash value.
In either case, it's not always easy to undo a non-forfeiture benefit once processed by a life insurer, so it's a really good idea to ensure you have the APL option active to protect you from accidentally triggering the non-forfeiture feature of your whole life policy.
Can I Remove the APL Feature from my Policy?
Yes you can change the active status of premium loan to non-active. This means that if you do not pay the premium within the grace period, you will trigger the non-forfeiture benefit of the policy.
Removing the APL feature from your whole life policy is generally a bad idea, but if you do make sure you understand the non-forfeiture benefit selected for your policy in the case you do not pay the premium.
How the Premium Loan Feature Differs from other Options to Pay Premiums
While the automatic premium loan provision is a nice safety net to ensure premium payment so you don't lose your life insurance coverage, there are other ways you can pay the premium due on your whole life policy with its cash value or dividends.
One of the several dividend options available to whole life owners is the ability to use dividends to pay premiums. This feature is not automatic and it does require the policyholder to officially make a change to the dividend option.
Whole life policy owners can also choose to withdraw cash from their whole life policies to pay the premium due. This again is not usually an automatic feature (though some companies are making changes to this policy), and will require the policyholder to make a specific request to pay the premium due with cash from the policy.
So the best assurance against losing or dramatically altering your whole life policy due to non premium payment is to ensure that you have the automatic premium loan provision activated.
I am the listed beneficiary of a 1 million whole life policy and a rider with a 1 million annually renewable term life policy. The biggest problem with the rider is that the premium goes up in value every year. Currently, the annual dividend covers the majority of the 32k annual premium for the whole life policy. But, there’s nothing left over to cover the rider premium. The rider premium for this year is going to be 30k and go up approximately 3k each year. Questions:
1) Do most life insurance companies allow the policy to just continue to take out a loan every year to cover the premium balances?
2) If mine does, and the death happens in a decade, roughly how much would be deducted from the 2 million? Thanks.
Hi Joseph,
I can only answer question #1. The answer to that is most companies will allow you to use the automatic premium loan to pay premiums until there is not enough cash value to create a loan to pay the premium (if that ever happens).
Question #2 is something you need to discuss with the life insurance company or the agent of the policy. I can’t give you details that are specific to a policy I cannot see.