A cash value life insurance policy often includes several optional clauses. One is called an automatic premium loan provision. The provision allows you to automatically borrow from the accumulated cash value in your policy at the end of a grace period for unpaid premiums. This can help you maintain your life insurance coverage if you miss payments on your policy because of a hardship, mistake or any other reason.
Cash value life insurance premiums have two parts. A portion of each of your premium pays for the cost of insurance, while the rest is invested in a savings account. The accumulated value of the savings account is the cash value of the policy. By contrast, term insurance policies do not contain a saving account. A term premium pays insurance costs only. This means these policies have much lower premiums but do not offer a premium loan provision.
Typically, a cash value policy will allow you to borrow a part of the accumulated funds from your account after the balance reaches a certain level. Since you are borrowing your own money, the insurance company cannot require you to repay the loan. The insurance company adds unpaid interest to your loan balance. If you cancel your policy, the loan will be deducted from your cash value and you will receive the balance. If you die, the loan will be deducted from benefits paid to your survivors.
Generally, you must pay your life insurance premiums within 30 or 31 days to avoid cancellation. This period is called the grace period. If you die during the grace period, the insurer will deduct the unpaid premium from benefits due to your beneficiary. After the grace period the policy is lapsed or cancelled. Your insurer will not pay benefits for lapsed policy However.you can reinstate a lapsed policy by paying all missed premiums.Insurance companies generally require proof of insurability for reinstatement. This means your application for reinstatement could be declined if your health has changed.
The automatic premium loan provision is an important feature of cash value life insurance. When you have accumulated cash value this provision gives you flexibility. With this provision, if you experience a financial setback, you can maintain your coverage. Even If you do not have a hardship, this provision allows you to skip premiums at your discretion. However, for many people one of the most important benefits is the elimination of the possibility of a lapsed policy for a missed payment due to a careless mistake.