The automatic premium loan provision:
- A.Doubles the death benefitNo provision multiplies the face amount. This one actually reduces what the beneficiary collects until the borrowed premium is repaid.
- B.Uses cash value to pay a missed premiumCorrect - prevents unintended lapse.
- C.Refunds premiumsMoney moves the other direction. The provision borrows from cash value to cover a premium rather than returning premiums to the owner.
- D.Cancels the policyThe exact opposite of its purpose. It exists to keep the contract alive when a payment is missed.
Why: It uses available cash value to pay a premium that would otherwise go unpaid, preventing a lapse.
Delphi Mutual's automatic premium loan provision advances the annual premium from cash value and charges 8 percent interest in arrears. Ferris's whole life policy has 6,200 dollars of net cash value available for loans, an annual premium of 1,450 dollars, and no existing loan. Ignoring further cash-value growth, how many consecutive annual premiums can the APL advance before the balance would exceed the available cash value?
- A.FourThis divides 6,200 by 1,450 and ignores the compounding interest the provision charges. Interest is what shortens the runway.
- B.OneThe APL is automatic and repeating. It advances premiums year after year until there is no loan value left, which is precisely what makes it dangerous when unmonitored.
- C.ThreeCorrect. The balance after three advances is 5,083.86 dollars; a fourth would exceed the 6,200 dollars available.
- D.TwoThis assumes the insurer stops once the loan passes half the cash value. No such limit exists; the APL runs until the cash value is exhausted.
Why: Each advance is added to the loan and the whole balance then accrues 8 percent. After year one the balance is 1,450 x 1.08 = 1,566.00 dollars. After year two, (1,566.00 + 1,450) x 1.08 = 3,257.28 dollars. After year three, (3,257.28 + 1,450) x 1.08 = 5,083.86 dollars, still under 6,200 dollars. A fourth advance would immediately push the balance to 6,533.86 dollars, above the available cash value, so only three premiums can be advanced. The clue is that interest compounds on the growing balance, not just on each new advance.
A whole life owner forgets to pay a premium but has elected the automatic premium loan provision and has sufficient cash value. What happens?
- A.The policy immediately lapsesAPL exists to prevent a lapse by borrowing from cash value.
- B.The insurer pays the premium as a loan against the cash value, keeping the policy in forceCorrect — that is exactly how the automatic premium loan provision works.
- C.The face amount is permanently reduced to paid-up statusThat describes reduced paid-up nonforfeiture, not the automatic premium loan.
- D.The premium is permanently forgivenThe premium is advanced as a loan, not forgiven; it accrues interest.
Why: The automatic premium loan provision has the insurer automatically pay the overdue premium as a loan against the cash value, preventing a lapse. The loan accrues interest and reduces cash value and death benefit until repaid.
A whole life policyowner misses a premium and the grace period expires. His policy includes an automatic premium loan (APL) provision and has substantial cash value. What happens?
- A.The policy immediately lapses without valueWrong. Cash value prevents a valueless lapse.
- B.The policy automatically converts to extended term insuranceWrong-but-tempting. Extended term is the default NONFORFEITURE option when there is no APL election.
- C.The face amount is permanently reduced by the missed premiumWrong. Face reduction describes reduced paid-up, not APL.
- D.The premium is paid by an automatic loan against cash value and the policy continues in forceCorrect. APL keeps the contract intact via an internal loan.
Why: The APL provision automatically borrows the overdue premium against cash value, keeping the original policy fully in force with a growing loan balance; only when loan capacity is exhausted would the policy face lapse and nonforfeiture options. Citation: standard automatic premium loan provision. Takeaway: APL preserves the original policy by borrowing premiums internally.