Automatic Premium Loan Provision: How It Prevents Policy Lapse

If you have a whole life insurance policy with a cash value, it might have an automatic premium loan provision clause. In this case, the insurance provider can withdraw your premium payments from the cash value of your policy if you fail to pay as agreed. This prevents your policy from lapsing if you can't afford the premiums.

How Does an Automatic Premium Loan Provision Clause Work?

If you have this clause on your cash-value whole life policy, the provider will automatically take unpaid premiums from the cash-value account if your policy is in danger of lapsing. Whole life insurance policies divert part of your premiums to a cash account that accumulates interest over time. The cash-value account is separate from the death benefit of your policy, which is the amount your beneficiaries will receive upon your death.

With most policies, you have 60 days to pay the premium before the automatic premium loan provision clause takes effect. Some policies have a different grace period, so be sure to check your documents. If you don't have this provision, your life insurance policy will lapse if you can't make payments. You'll also lose the ability to borrow against your cash-value account, a major benefit of whole life coverage.

What Is a Premium Loan Payment?

If your policy uses the automatic premium loan provision to pay your premiums, you have to repay the amount withdrawn from your cash account. This additional payment on top of your premium is called a premium loan payment.

You also make a premium loan payment if you borrow against the value of your plan's cash account. This strategy lets you access funds for home improvements and other large expenses without going through a credit check with a traditional lender. You can also save on interest by borrowing money from your own whole life policy.