insured does not pay the premium on the due date, the company automatically will pay the premium and charge it against the cash value of the policy.
The loan will bear interest at the rate applicable to policy
loans as stipulated in the contract. The effect of the provision is to extend the original face amount of
the insurance, decreased by the amount of the loan plus interest, for as long as the remaining cash value is sufficient to permit the advance of an additional premium. This provision may be very beneficial for the policyholder, particularly for one who forgets to pay the premium within the grace period or one
who cannot pay the current premium because of financial difficulties. The most important
aspect is
that the policy does not lapse. When the insured is again financially able, he or she can start paying the
premiums and will not be subject to the conditions imposed in the event of a reinstatement. Another
advantage is that any special coverages such as double indemnity and disability coverages will remain
in force.4 In addition, if the policy is participating, dividends will continue to be paid,whichwould not
be true under the extended term option. After the policy has been in effect for a period of time, it is possible
for the increase in cash value each year to exceed the premium payment. In these cases, the policy
is capable of sustaining itself, for a loan against the cash value to pay the premium permits an increase
in the cash value that is sufficient to pay the next year’s premium. Of course, the amount of protection
provided by the policy is decreased by the amount of any loans outstanding, so the automatic
premium loan provision must be considered as a device that can consume protection under the policy.
There are also disadvantages in the automatic premium loan provision. Most important, if the premium
payments are not resumed by the insured and the cash value of the policy is low, the contract may
eventually terminate. It is even possible that the period in which the policy will remain in force under
automatic premium loan will be shorter than under the extended term option, and the amount of
insurance coverage will be considerably less.
The automatic premium loan feature also has the disadvantage of being used on the slightest provocation.
An insuredwho has the choice of paying the current premium or using the money to finance a Fridaynight
party may be inclined to choose the party—of course, with the solemn promise that the loan will be paid off in the near future.
Most companies now offer this provision, but it is optional, and an election must be made at the time the policy is taken out or at least before the premium is in default. Various companies handle the option differently: some specify that the insuredmust notify the company if he or she wants the provision to
apply, while others make the provision automatic, and the insured must specify if it is not wanted.
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