Automatic Premium Loan Provision

Automatic Premium Loan Provision

In some whole life insurance policies, a clause providing for a loan from the policy's cash value in the event the policyholder does not pay the premium. The automatic premium loan provision mandates the payment of the premium with this loan in order to prevent the lapse of the policy.
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There is a downside to the automatic premium loan when abused; "the automatic premium loan provision makes it too easy for the insured to avoid the payment of premium in cash." (97) Furthermore, to the extent interest is still deductible, it is not deductible in the case of an automatic premium loan since the interest is borrowed from the insurer rather than paid by the policyowner in cash.
(94.) The terms of the automatic premium loan provision usually give the insurer the right to change the frequency of premium payments.
Many companies provide an automatic premium loan provision, but the policyowner must in some states actively elect to make the feature operative.
Lapse can be avoided with the automatic premium loan provision, but then each failure to pay premiums will incur a loan against the policy.
automatic premium loan provision: An option that will allow the insurer to automatically borrow money from a policy's cash value to pay any premium in default at the end of the grace period in order to keep a policy from lapsing.
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