A policyowner fails to pay a premium on time and lets the grace period expire. The whole life policy has cash value and an automatic premium loan provision. What happens?

Why A is correct

The automatic premium loan (APL) provision authorizes the insurer to borrow from the policy's cash value to pay an unpaid premium once the grace period ends, keeping the policy in force. The loan, plus interest, is charged against the cash value and is deducted from the death benefit or cash value at a later date. APL prevents an unintended lapse for policyowners who miss a payment but have sufficient cash value. If the cash value is insufficient to cover the premium, the policy may still lapse.

Why the other options are wrong

• B) With an APL provision and sufficient cash value, the policy does not terminate; the insurer automatically makes a policy loan to pay the overdue premium. A policy loan is made automatically, and the coverage continues exactly as before.
• C) The death benefit is not reduced as a penalty; the APL loan is repaid from the eventual death proceeds, but the face amount coverage remains in force. The face amount is not lowered; only the eventual proceeds are reduced by the loan balance and interest.
• D) The insurer does not cancel and refund the cash value when APL exists; the cash value is used as loan collateral to continue the coverage. The cash value remains in the policy as collateral instead of being refunded to the owner.

Memory hook

Missed premium + cash value + APL = the policy pays itself and stays alive.