Texas General Lines — Life, Accident, Health and HMOGeneral InsuranceMedium
A client is concerned about the possibility of their life insurance policy lapsing due to financial hardship. Their agent explains that a provision exists where, if the policy has sufficient cash value, the insurer can automatically pay an overdue premium from the cash value to prevent lapse. What is this provision called?
- AExtended Term Option
- BReduced Paid-Up Option
- CAutomatic Premium Loan
- DWaiver of Premium
Show answer & explanationAnswer & explanation
Correct answer: C. Automatic Premium Loan
The Automatic Premium Loan (APL) provision is a common feature in cash value life insurance policies. It allows the insurer to automatically borrow from the policy's cash value to pay an overdue premium, preventing the policy from lapsing. This loan must be repaid with interest.
Why the other options are wrong
- A. Extended Term Option is a nonforfeiture option that converts the cash value into a paid-up term policy for the same face amount.
- B. Reduced Paid-Up Option is a nonforfeiture option that converts the cash value into a paid-up whole life policy for a reduced face amount.
- D. Waiver of Premium is a rider that waives premiums if the insured becomes totally disabled, not for financial hardship.
Automatic Premium Loan (APL)
A life insurance policy provision that authorizes the insurer to automatically pay any premium in default by borrowing from the policy's cash value.
- Prevents policy lapse due to unpaid premiums.
- Available only if policy has sufficient cash value.
- Loan accrues interest and reduces death benefit/cash value if not repaid.
Memory trick: APL: Auto-Pay Loan, no policy gone.