When you buy a life insurance policy, your insurance company might offer you different riders, provisions, and add-ons that you can attach to a specific policy.
An automatic premium loan provision is one of the extra features you can get to improve the quality of your life insurance policy.
But what is an automatic premium loan provision, and how does it work? Which life insurance policies can include this provision?
Let’s find out.
What is an Automatic Premium Loan Provision?
An insurance provider may borrow money from the policy’s cash value under an Automatic Premium Loan (APL) Provision to pay for missed premiums. This allows your permanent life insurance policy to remain in force instead of lapsing accidentally.
Usually, an insurance company provides an automatic premium loan grace period of 30 or 60 days. The grace period is placed so that you can act and prevent the premiums from being deducted from your cash value.
All you need to know at this point is that an automatic premium loan is tied to life insurance policies with cash value. Later in the article, we will cover the policies that have this provision.
How does an automatic premium loan work?
If you decide to use an automatic premium loan provision, you need to know how it works.
Cash value is one of the most important aspects of every permanent life insurance policy. With monthly premium payments, your cash value grows. After a few years, you can use the accumulated cash value for some expenses or investments outside of your policy.
If the premiums remain unpaid, the policyholder cannot borrow against the cash value, but even worse things can happen: policy lapse and coverage loss.
Once attached to your permanent life insurance, an APL provision prevents this from happening. You allow the insurance company to use your cash value money to pay premiums and extend the life of your policy. This can be useful in case you simply forgot to pay premiums or you were unable to pay for the coverage for a month or so.
The policyholder continues with premium payments despite the missed payment, but now they also need to pay back any premiums withdrawn from the cash value.
If they decide not to do it, the amounts are treated as automatic premium loans and work as any other cash-value loans. They will be deducted from your death benefit if you never repay them.
Cash Value Life Insurance Policies That Include Automatic Premium Loan
Not every policy has the option to add the automatic premium loan provision to it. Term life insurance policies, for example, cannot feature the automatic premium loan provision because they don’t have cash value.
As for the universal life policies, they also cannot feature an automatic premium loan. Even though they are permanent life policies, their premiums are flexible, and the expenses are always deducted from the available cash value, so, in a way, the automatic premium loan is already integrated.
An automatic premium loan provision applies to whole life insurance policies. They have the cash value and premium payments you must take care of and therefore qualify for automatic premium loan provisions.
How to Obtain an Automatic Premium Loan?
To add your APL provision to the policy, the insurer has to offer that option first. If there is such an option, policyholders can add or remove this provision from a qualifying life insurance policy at any time.
There aren’t any restrictions on adding or removing the policy loan provision, and you can do it whenever you see fit.
Having whole life insurance means you will have to pay monthly premiums. An automatic premium loan provision is great if you forget to make a payment or cannot do it, so including it from the beginning is a good idea.
Example of Using Automatic Premium Loans
Since an automatic premium loan is a clause that is added to your policy, an insurer provides the option to deduct a certain amount from your cash value to pay premiums.
For example, if you forget to make a timely payment, the insurer will take the money out of the policy’s cash value and use it to cover premiums.
Pros and Cons of Automatic Premium Loan
An automatic premium loan has only one benefit, but it is threefold. It has a positive effect on:
- Life insurance policyholder
- Insurance company
- Whole life insurance policy
The insurance policy provision will cover the policyholder if they forget or are unable to make the payment for one or more months. Furthermore, the APL provision prevents whole-life policies from lapsing. Last but not least, the insurance company doesn’t have to send you a notice if you are late paying your premium.
On the other hand, you don’t want to rely too much on your APL provision because it carries an interest charge. You will be paying back the automatic provision loans taken from your cash value with interest.
If policyholders continue to take loans, their cash value can be reduced to zero. Despite the fact that you automatically renew the policy with each monthly payment, you still need to keep an eye on what’s going on with your coverage and not let things slide.
Remember that you want your cash value to keep growing so you can borrow against your policy while using the cash value as collateral.
This brings us to the design of your whole life insurance policies and which additions to include.
Use Your Life Insurance Policy for Infinite Banking
While some add-ons for your life insurance policies can accelerate cash value growth, they aren’t imperative when you want to use your whole life policy’s cash as collateral and take loans to build wealth.
You want to increase your policy’s cash value which you will use as collateral and take loans from the insurance company. You will use that money for investments, but you will also pay yourself interest and recapture it. This will allow you to repeat this process again and again until you build generational wealth.
In a nutshell, you become your own banker, a concept known as Infinite Banking.
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If you are unfamiliar with Infinite Banking, we invite you to watch our free masterclass.
Feel free to contact us and let us know how we can help you with your journey to own your own lifestyle.