An automatic premium loan (APL) is a provision in permanent life insurance policies that prevents the policy from lapsing if a premium payment is missed. When the APL provision is activated, the insurance carrier automatically borrows against the policy's cash value to pay the overdue premium, keeping the policy in force. The borrowed amount, plus interest, is charged as a policy loan against the cash value.
The APL provision is an important safety net that prevents accidental lapses due to overlooked payments, temporary financial difficulties, or administrative errors. Without APL, a permanent policy could lapse after the grace period expires, potentially resulting in the loss of years of accumulated cash value and the death benefit. With APL, the policy remains fully in force as long as there is sufficient cash value to cover the premium loan.
However, repeated use of the APL feature has cumulative consequences. Each loan reduces the available cash value and the net death benefit. Interest charges on the loan increase the balance over time. If the total loan balance (accumulated premiums plus interest) eventually exceeds the cash value, the policy will still lapse. Additionally, if the policy lapses with an outstanding loan balance that exceeds the cost basis (premiums paid), the excess may be taxable as ordinary income.
Most permanent life insurance policies offer the APL provision as an optional feature that can be elected when the policy is purchased or added later. Some carriers make APL the default setting. Policyholders who prefer a different nonforfeiture option (extended term or reduced paid-up) if premiums are not paid should ensure the APL provision is not selected. A licensed agent in our network can explain how the APL provision works for specific policies you are considering.