Automatic Premium Loan

An automatic premium loan (APL) is a policy provision in cash-value (permanent) life insurance that lets the insurer cover an overdue premium by taking a loan against the policy’s accumulated cash value. The loan is applied automatically when a premium remains unpaid past the policy’s grace period, helping prevent the policy from lapsing for nonpayment.

Key takeaways

• APLs use a policy’s cash value to pay overdue premiums automatically, avoiding lapse of coverage.
• The amount advanced is treated as a policy loan and accrues interest.
• Outstanding loans plus interest reduce the policy’s cash value and, if unpaid at death or surrender, are deducted from the death benefit or cash surrender value.
• An APL is only available if the policy has sufficient cash value and if the policy contract permits the loan.

How automatic premium loans work

• Only cash-value life insurance policies accumulate the funds an insurer can borrow against; term life policies do not qualify.
• If a premium is unpaid after the grace period (some contracts specify an additional window, e.g., 60 days), the insurer may deduct the overdue amount from the policy’s cash value automatically.
• The payment is recorded as a policy loan. Interest accrues on that loan at the rate specified in the policy.
• If loans and interest exhaust the cash value, the policy will lapse. If the policy is canceled with an outstanding loan, the insurer subtracts the loan balance and accrued interest from any remaining cash value or death benefit.

Eligible policies

• Generally available only on permanent policies that build cash value — most commonly whole life and some universal life (UL) policies.
• Universal life policies sometimes disallow APLs or have restrictions because ongoing expenses are deducted from their cash value; availability depends on specific policy language.

Special considerations

• No credit check or external collateral is required since the loan is secured by the policy’s cash value.
• Interest on the loan continues to accrue; repeatedly using APLs can deplete cash value over time.
• Any outstanding loan balance at the insured’s death will reduce the death benefit.
• Policy terms vary; some contracts may prohibit loans unless premiums have already been paid in full or may set other conditions. Insurers typically notify policyholders when an APL is used.

When to use an automatic premium loan (and alternatives)

• APLs can be helpful if you temporarily cannot pay a premium and want to keep coverage in force without interruption.
• Consider the cost: interest charges and the potential long-term reduction in death benefit.
• Alternatives include paying the premium directly, arranging a standard policy loan (if preferred), or contacting the insurer to discuss options before cash value is used.
• Review your policy language and speak with your insurer or financial advisor to understand the exact terms, interest rate, and implications for your specific policy.

Bottom line

Automatic premium loans provide a built‑in safety net for permanent life insurance policies by using cash value to prevent lapses, but they are still loans that incur interest and can reduce future benefits. Read your policy carefully and consult your insurer before relying on APL provisions.