Prevent a Whole Life Insurance Policy From Lapsing with Automatic Premium Loan

Life Insurance

The Automatic Premium Loan (APL) is a feature available on whole life insurance policies that allows cash values within the policy to pay premiums before the policy lapses due to non-payment. APL does this by taking loans against the cash value. This important no-cost feature can maintain your life insurance policy when you may have forgotten to pay the premium.

A lapsed whole life insurance policy requires a reinstatement process in which the life insurance company may require the insured to answer medical questions. If the insured’s health has changed since the issue of the policy, the possibility exists for a decline of the reinstatement request. Policyholders taking loans on policies are charged a loan interest rate that may be either a fixed rate or more commonly, an adjustable rate. A loan transaction statement will be sent when a loan occurs, confirming the transaction.

The APL feature can intentionally be used in instances when there is difficulty in making  premium payments, either temporarily or for a length of time, if the cash value exists to allow policy loans to pay premiums. A policy will formally “lapse” if the loan indebtedness exceeds the cash value of the policy. This could result in a potential taxable gain to the policyholder. In my opinion, caution must be used when structuring a whole life policy to maintain itself via policy loans.

I recently spoke with a client who purchased a whole life policy 4 years ago and was considering surrendering the policy for the cash surrender, which was significantly less than premiums paid, due to a temporary financial hardship. The policyholder needed the cash value and couldn’t afford the premiums to maintain the policy. My client was disappointed the policy couldn’t be continued because the purpose of the policy was to provide a death benefit as well as cash value for supplemental retirement income.

After reviewing their cash value statements, I recommended they take a policy loan and change the billing mode to annual premium mode from monthly bank draft. Since the increase in cash value exceeded the annual premium this year, I recommended they use the APL feature to pay the annual premium. This would maintain the policy. The policyholder felt that the loan and loan interest could be repaid in a short time and out-of-pocket premium payments could resume in a short time.

My client was happy and relieved that the policy did not have to be surrendered, resulting in a substantial loss. By utilizing the APL feature, their policy remained intact. A win-win for the client!

About the author:  Ken Buccico holds a LUTC designation and has been in the life insurance business for 39 years. His wealth of experience empowers clients to make best possible decision regarding a life insurance policy. To explore the best life insurance option, contact Ken at 1-800-651-1953 or