What is an automatic premium loan provision?


An automatic premium loan provision is protection against whole life policies lapsing due to a missed payment. Your insurance company uses your policy’s accumulated cash value to cover the missing fee, which will accrue interest. An automatic premium loan provision will cover you occasionally, but it’s still best to make your payments on time.

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UPDATED: 2022-07-22T12:06:48.178Z
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What You Should Know

  • An automatic premium loan provision uses accumulated cash value on a policy to cover a missing payment so the policy doesn’t lapse
  • This is only available for whole or permanent life policies – term life doesn’t accumulate value, so there’s nothing to borrow against
  • Most whole life policies have this coverage built-in, but you can usually purchase it if it isn’t

For many Americans, life is hectic. It can feel like there are a million things to remember each day – school, kids, and work demands a lot of attention. Forgetting a bill here or there is understandable whether your schedule is packed or empty.

Unfortunately, forgetting a bill can come with serious consequences. This can be incredibly frustrating if the money is waiting in your bank account and you simply forgot.

Some bills aren’t as bad as others to forget. One bill you don’t want to forget is your life insurance bill.

If you go too long without paying for it, your coverage might lapse, and you can lose your policy.

Many companies offer an add-on for whole life insurance plans to stop your policy from lapsing. An automatic premium loan provision is designed to use the cash value your plan accumulates to pay your insurance bill, keeping you up to date and insured.

If you know you’re a little forgetful, finding a policy with an automatic premium loan provision option is simple when you compare companies. Enter your ZIP code into our free tool to see what quotes might look like for you.

What is an automatic premium loan provision?

For most people, term life insurance is the best option for their needs. It’s more affordable, easy to understand, and lasts only as long as you need. However, whole life insurance comes with some serious benefits.

Amongst many others, one of the best benefits is that they accumulate cash value every time you pay your bill. When you’ve accumulated enough, you can borrow against it for whatever you like.

If you don’t read the fine print of your life insurance policy, you should know that most companies have a clause in the contract that allows them to pull from your accumulated value for delinquent payments. However, delinquent payments can lead to your policy being revoked, even if the company pulls from your cash value.

For additional protection for you as the policyholder, many companies offer an add-on you can purchase called an automatic premium loan provision. This add-on grants your company permission to withdraw from your cash value if you forget to pay your bill.

However, this isn’t a backup payment option – it’s a loan. That loan has to be repaid and accrues interest until you pay it. For example, if you miss a monthly payment of $100 but have automatic premium loan coverage, your insurer will loan you the payment from your cash value.

If you don’t pay back the loan before you die, the amount will be deducted from your death benefit before paying the rest to your beneficiary. However, it doesn’t affect the value of your death benefit – the insurance company still pays the full total, minus whatever you owe.

While you can avoid a lapse in coverage by keeping your account up to date, life insurance companies are reporting higher numbers of policies lapsing recently. While there are numerous reasons, experts believe that recent economic hardships due to Covid-19 are the driving force behind the increase.

Is there an automatic premium loan provision grace period?

One of the features of this add-on is that there is a specific grace period before your provider will deduct from your cash value. After all, it wouldn’t be a good deal for you if the company pulled money from your accumulated value every time you were even a few hours late.

The grace period varies by company, but it typically starts on the first day your payment is late and ends when the company would cancel your insurance. An automatic premium loan payment ensures you don’t lose your coverage, so it usually kicks in right before you lapse.

Again, every company is different, but the time it takes for a policy to lapse is usually between 30 and 60 days. You can expect your loan provision to make a payment after an average of 60 days.

Can you get a policy loan provision for term life insurance?

One of the key features of an automatic premium loan provision is that it’s borrowing against your policy's cash value. Therefore, your policy has to accumulate value for the provision to work.

Term life policies don’t accumulate a cash value, so there is no loan option to protect it. If you’re concerned about making payments on time, you probably don’t need to worry about being a day or two late. Most term policies have a grace period of about 30 days before your policy lapses.

For term policies, the best way to guarantee you never have to worry about losing your insurance is to set up automatic payments with your bank account. If your policy lapses, you can call and ask to reinstate it. You might face restrictions (or the company could say no), but it’s worth asking.

What other add-ons can you buy for a life insurance policy?

Sometimes, you don’t need to buy an automatic premium loan provision add-on because the insurance company includes it as part of the plan. Whether you buy it or not, there are several other add-on options to choose from, including the following:

• Waiver of premium. If you become disabled or so sick that you can’t work, this add-on gives you a specific period where you don’t need to pay your monthly bill. Usually, you have to add this to your policy when you sign up.

• Accidental death. If you buy this coverage, your beneficiary will receive a larger payout if you die from an accident, such as drowning. It usually doesn’t pay out for suicide, alcohol or drug-related deaths, or mental illness.

• Guaranteed insurability. This add-on gives you the option to increase your coverage amount without going through another medical exam.

• Return-of-premium. If you outlive your term insurance plan, this add-on will refund you some of the money you spent. Keep in mind that this raises the price of your insurance, so it might not be the best value in the long run.

• Family income. If you want your beneficiary to receive the payout in monthly installments instead of one lump sum, you can buy this add-on.

• Disability. If you become permanently disabled, this add-on will give you monthly payments from your death benefit.

• Spousal. This covers your spouse, but it doesn’t provide as much coverage as a separate policy would.

• Child. Rather than buy a separate policy for a child, you can sometimes add them to your own policy for a small amount of coverage.

• Accelerated death. If you are diagnosed with a terminal illness like cancer, a portion of your death benefit will be available to you. There are typically no restrictions to how you can spend the money, though most people use it for medical bills.

• Long-term care. Like accelerated death, a long-term care add-on will give you access to part of your death benefit if you require daily help.

• Term conversion. Another add-on specifically for term policies, this allows you to convert your term plan to a permanent one at the end of it. This is only a sampling of insurance add-ons you can purchase. Every company offers different add-ons for your life insurance policy, but those listed above are relatively common.

Find Insurance With Automatic Premium Loan Provisions

If you have a permanent life insurance policy, an automatic premium loan provision can help keep you safe from losing your coverage. It’s still best to pay your bills on time since you’ll have to pay interest on a loan, but it’s better than losing your policy.

Finding a whole life policy with an automatic premium loan provision is easy when you compare quotes from different companies. Enter your ZIP code into our free tool if you want to see what quotes might look like for you.

References:

  1. https://www.huffpost.com/entry/the-life-insurance-indust_b_1937246
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