A whole life policy includes an automatic premium loan (APL) provision. If the policyowner does not pay a premium and the policy has sufficient cash value, the insurer will:

Why A is correct

Under an automatic premium loan provision, if the premium is not paid by the end of the grace period and the cash value is sufficient, the insurer advances the premium as a loan secured by the policy's cash value. The policy stays in force, interest accrues on the loan, and the outstanding loan amount plus interest is deducted from the death benefit or surrender value. APL prevents an unintentional lapse when the policyowner has built up enough equity in the policy, and it remains in effect as long as the cash value can support the loans.

Why the other options are wrong

• B) The policy lapses only if the cash value is insufficient to cover the premium loan; with enough value, APL keeps the policy in force. The provision protects the policyowner from losing coverage due to a missed payment when equity exists.
• C) The premium is repaid from policy values with interest; it is not forgiven, and the death benefit is reduced by the loan balance. A lapse occurs only when the cash value is too small to advance the premium and keep the policy going.
• D) The loan is advanced when the premium becomes due to fund that premium; it is not merely set aside to be deducted at death. The insurer is repaid from the policy values with interest, so the obligation is not forgiven.

Memory hook

APL: cash value lends the premium so the policy lives on. Every loan dollar later comes out of the proceeds.