Her Old Whole Life Policy May Pay Its Own Premium If She Misses One, Through a Feature Called an Automatic Premium Loan
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A whole life premium can go unpaid past its due date for many reasons, including a long hospital stay, and a common concern in that situation is whether the coverage has ended. Depending on how the policy was set up, it may have paid its own premium through a feature called an automatic premium loan.
An automatic premium loan, often shortened to APL, is part of many whole life and other cash value policies, and cash value is the savings that builds up inside a permanent policy as premiums get paid over the years. An APL lets the insurer automatically issue a loan against the policy’s cash value to cover a missed premium and prevent the policy from lapsing.
How a Missed Premium Becomes a Loan Instead of a Lapse
Everything starts with the grace period. That’s the window after a due date when you can still pay a late premium and keep the coverage in force. North Carolina’s Department of Insurance says life policies provide a minimum grace period of 31 days[1] after the due date. If the insured dies during that window, the insurer may deduct the premium due from the death benefit[1].
If the premium still isn’t paid when the grace period ends, the APL takes over. Wisconsin’s insurance regulator defines it as a provision. Under that provision, an unpaid premium “is automatically paid by a policy loan if there is sufficient cash value.”[2] North Carolina’s regulator says it keeps the policy from expiring “provided the available loan value is sufficient to pay the premium.”[1]
Why the Feature Might Be Switched Off Without Anyone Knowing
Despite the name, the feature doesn’t turn itself on in every policy. North Carolina’s regulator notes that “in most cases the policyowner must choose to enact this provision.”[1] The insurance reference publisher IRMI also calls it “an optional provision.” Someone who signed the paperwork decades ago may not remember whether she chose it.
It also only works on policies that have cash value. Term life covers a set period and pays death benefits only if the insured dies during the term[2], so there’s no savings for an APL to borrow from. A whole life policy with little cash value can come up short too, since the loan can only cover what the available value allows.
What an Automatic Premium Loan Costs Over Time
The premium gets paid with borrowed money, and that loan charges interest. Wisconsin’s regulator describes a policy loan as money borrowed “at a specified rate of interest”[2] with the cash value as collateral. If the insured dies with the loan unpaid, the insurer deducts the amount borrowed, plus any accumulated interest, from the claim amount payable[2]. Until it’s repaid, the loan also cuts the cash value available to borrow or cash out.
Costs build up further when an APL keeps covering premiums year after year. Each missed payment adds to the balance, and unpaid interest gets added on top. Our earlier piece on a policy lapsing with a loan still on it explains what happens when debt becomes too large: the policy expires, and the outstanding loan may trigger taxable income. For tax purposes, that payoff counts as money she received, even though no check comes.
The IRS taxes amounts from a surrendered policy that exceed its cost. That cost is generally the total premiums paid, less any refunded premiums, rebates, dividends, or unrepaid loans not included in income, and the taxable portion is reported on Form 1099-R. A lapse with a large loan can produce a tax bill for money spent on premiums years earlier.
How to Check Whether the Feature Is On
Finding out takes a policy document and a phone call. The common steps look like this:
- Reading the policy for a section titled automatic premium loan, along with any election on the application attached to the contract.
- Calling the insurer’s customer service line and asking whether the APL is active on the policy.
- Asking how much cash value is available for loans and whether a loan balance already exists.
- Requesting an in-force illustration. It projects how the cash value, loan balance, and death benefit will change at current rates and shows the year the policy is expected to lapse if nothing changes.
- Asking whether the provision can be added if it’s currently off, since rules vary by policy and insurer.
An older policy may no longer be needed. Our coverage of cash value life insurance and of selling a policy through a life settlement walks through other options, including cases where an investor’s price can beat what the insurer would pay on surrender.
How an APL Can Protect or Erode a Whole Life Policy
An APL can keep coverage active through a hospital stay, a lost notice, or a missed autopay, as long as there’s enough cash value behind it. It can also hide a growing loan that eventually ends the policy and leaves a tax bill behind. For an older whole life policy, the insurer can confirm whether the automatic premium loan is turned on.
Contact [email protected] for any questions or corrections.
David Beren has been a Flywheel Publishing contributor since 2022. Writing for 24/7 Wall St. since 2023, David loves to write about topics of all shapes and sizes. As a technology expert, David focuses heavily on consumer electronics brands, automobiles, and general technology. He has previously written for LifeWire, formerly About.com. As a part-time freelance writer, David’s “day job” has been working on and leading social media for multiple Fortune 100 brands. David loves the flexibility of this field and its ability to reach customers exactly where they like to spend their time. Additionally, David previously published his own blog, TmoNews.com, which reached 3 million readers in its first year. In addition to freelance and social media work, David loves to spend time with his family and children and relive the glory days of video game consoles by playing any retro game console he can get his hands on.
