Which life insurance policy would be eligible to include an automatic premium loan provision? Life insurance policies have a certain provision that lets the insurer deduct their premium amount from the policy’s value in case the policyholder cannot make premium payments due. Regardless, if we are talking about automatic premium loan, this term is frequently linked to a life insurance policy since it includes a cash value account.
If someone has a life insurance policy with cash value, the premium payments will accumulate over time. This amount is known as the cash surrender value. Policyholders are allowed to loan against this account.
Many policies include a clause thatstates that the issuer can borrow against this automatically in the event of premium payment delinquency. This clause is known as the automatic premium loan. Usually, this component of life insurance is optional only.
The insurers are given the right to make automatic payments from the policy’s cash value within a predetermined grace period. Its purpose is to reduce the risk of lapse of the insurance policy due to nonpayment of premium. Furthermore, an automatic premium loan won’t affect the policy’s face value.
But just like other types of loans, this will accrue interest. The policyholder is expected to pay it back. This includes the total amount of loan and interest. If the policyholder passes away before he can pay off the loan, it will be subtracted against the payout amount.
Learning Which Life Insurance Policy Is Eligible To Include An Automatic Premium Loan Provision; Health And Life Insurers
Life and health insurance companies are providing coverage for the medical expenses due to injuries or illnesses and the risk of life loss. However, the purchasers of those insurance policies are expected to pay a premium in exchange for the protection they receive.
The issuer of the insurance may get from the policy’s cash value for the premiums overdue for as long as its cash value is equal or greater than the amount due for the premium.
How Automatic Premium Loan Works?
Let us assume that you purchase a life insurance plan and it has an automatic premium loan provision. Particularly, the insurance issuer has a choice to deduct $500 from the cash value accumulated in your insurance policy.
Assuming you forgot to pay for the premium on the supposed date. Then, based on the clause, the insurer can reduce the cash value portion of your policy. You might want to read what cash surrender value is to understand the previous statement.
With that being said, your nonpayment of the premiums will not result in the termination of your policy, and it will carry on as usual despite your missed payment.
Benefits Of The Automatic Premium Loan Provision
This provision offers benefits both to the policyholder and the insurer. For the latter, they will be able to collect premiums automatically and regularly. In addition, they need not send several notices to the policy owners for them to pay for the premiums.
Correspondingly, the policy owners can keep their coverage even though they missed paying for their premiums. You will only exercise this clause in case of overdue premium payments.
Policyholders are allowed to select a specific date to make payments of premiums regularly. But failure to pay for the premium will automatically allow the insurance company to deduct the premium amount due from the cash value of the life insurance policy.
Drawbacks Of The Automatic Premium Loan Provision
Just like other types of loans, this will also carry interest. Meaning to say, the policyholder needs to pay for both the loan amount and its accrued interest. In addition, if the policyholder loans out against his policy’s cash value, it can subsequentlyequentlyequentlyequentlyequently reduce up to zero.
This is especially true if the policy owner continuously takes out loans to make insurance premiums payments. Click here to find your policy number. Regardless, if that happens, it can lead to the termination of the policy since there will be no more value left wherein the loan will have to be taken to pay for the premiums.
Monitoring A Life Insurance Policy Loan
With life insurance policy loan, your insurance provider will not notify you to pay your loan balance back. They will also not provide any repayment schedule for your loans. You can opt to pay the loan interest every year out of your pocket. But you may also choose to borrow against the interest.
In case you opt for the latter, remember that your loan amount due will compound. This means that your yearly interest payable will compound. Therefore, one important thing to do is to request an in-force illustration of your policy annually so that you will know the effect of the loan on your policy.
It’s A Wrap!
Which life insurance policy would be eligible to include an automatic premium loan provision? Usually, a life insurance policy comes with an automatic premium loan provision. As mentioned earlier, this is an optional clause that will minimize the risk of a policy lapse. The face value of the policy will stay the same, but it accrues interest.
So regarding which life insurance policy would be eligible to include an automatic premium loan provision, the answer would be a whole life insurance policy since it has a cash value account. For more insurance article, read this one that talks about commercial package insurance.