An automatic premium loan (APL) provision in a life insurance policy:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The automatic premium loan provision authorizes the insurer to automatically pay a premium from the policy's cash value when the premium is not paid within the grace period, keeping the policy in force. The amount advanced becomes a loan against the cash value and accrues interest. This prevents an unintended lapse when the owner forgets to pay or temporarily cannot pay. If the cash value is insufficient to cover the premium, the policy may still lapse. APL is usually elected in the application or by a later written request from the policyowner, so it reflects the owner's choice to use accumulated values for continuity.
Why the other options are wrong
- B) APL does not change the scheduled premium; it pays the same premium using cash value rather than altering the premium amount by age. The provision addresses nonpayment, not repricing.
- C) The loan is against the policy's own cash value, not borrowed from a bank, which is why it requires an existing cash value to function. Without cash value the APL feature cannot operate.
- D) APL is not a paid-up conversion; it is a loan that must be repaid or deducted from the death proceeds at the insured's death. It preserves coverage temporarily, not permanently.
Memory hook
APL = the policy writes itself a check from its own cash value to dodge a lapse.