In the world of financial services, where risk and management are paramount and fiduciary responsibility is key, trustees of trust-owned life insurance (TOLI) policies face unique challenges in managing these assets. When clients have whole life policies within their trust, Automatic Premium Loans (APL) become a vital feature ensuring the continuity of coverage essential for financial and estate planning needs.
Let us explore what this feature is, how it works within whole life policies, and what can happen if premiums are missed without this safety net.
What is an Automatic Premium Loan?
An Automatic Premium Loan (APL) is a provision found in many whole life insurance policies that allows policyholders to borrow from their policy’s cash value to pay a missed premium. This feature acts as a safety net, ensuring that the policy remains in force even if the policyholder fails to pay the premium by the due date. The automatic loan is typically taken from the policy’s cash value, with the insurer lending the amount of the premium to keep the policy active.
The loan is automatically issued without the need for approval or additional paperwork from the policyholder. However, the policyholder is responsible for repaying this loan, which accrues interest at a specified rate. If left unpaid, the outstanding loan balance will be deducted from the death benefit when the policy is paid out to beneficiaries.
How Automatic Premium Loans Are Used in Whole Life Policies
Whole life insurance policies are designed to provide lifetime coverage, with an investment component that builds cash value over time. This cash value grows at a guaranteed rate, providing policyholders with a source of funds that can be accessed through loans or withdrawals. The Automatic Premium Loan feature leverages this cash value to ensure continuous coverage even if the policyholder misses a premium payment.
When a policyholder fails to pay a premium by the end of the grace period, the APL feature kicks in. The insurer automatically takes a loan from the cash value equal to the premium amount, ensuring the policy doesn’t lapse. This loan accrues interest, typically at a rate specified in the policy, and becomes part of the policy’s loan balance. The policyholder can repay the loan at any time, but if they don’t, the loan balance will continue to grow with accrued interest.
For professional trustees and fiduciaries, understanding this feature is crucial. It can be a valuable tool for advising clients on maintaining their whole life policies, especially in cases where unexpected financial difficulties arise. It provides a safety net that helps avoid policy lapses and the associated consequences for beneficiaries.
Read More: A TOLI Trustee’s Guide: Managing Suspended Premiums in Whole Life Policies
What Happens If a Premium is Missed Without an APL Feature?
Without the Automatic Premium Loan feature, missing a premium payment can have serious consequences for a whole life insurance policy. Typically, insurance policies have a grace period (usually 30 days) after the premium due date during which the policyholder can still make a payment without penalty. However, if the premium is not paid within this grace period, the policy can lapse, meaning that the insurance coverage ceases to exist.
A lapsed policy can lead to significant complications for policyholders and their beneficiaries. If the policyholder passes away while the policy is lapsed, there is no death benefit, leaving the intended beneficiaries without financial support. Additionally, reinstating a lapsed policy can be complex and may require providing evidence of insurability, paying back premiums, and additional fees.
For fiduciaries and trustees managing estate plans, the risk of a policy lapse due to missed premiums can have ripple effects across estate distributions and tax planning. This makes the APL feature a valuable safeguard, allowing you to maintain the integrity of your client’s financial plan even in challenging times.
Read More: Premiums Affect Cost in Permanent Life Insurance
Conclusion
Automatic Premium Loans offer a critical safety net for whole life insurance policyholders, ensuring that policies remain in force even if premium payments are missed. For fiduciaries and trustees, understanding this feature is essential for advising clients on risk management and maintaining financial stability. By using the APL feature, you can help clients navigate unexpected financial challenges without compromising their long-term estate planning goals. It’s a small but vital part of a larger risk management strategy that supports the interests of both policyholders and their beneficiaries.
Our team of life insurance experts are experienced at working with all types of trust owned life insurance policies, including whole life policies with APLs. Our trust-owned life insurance management solution helps banks and trust companies reduce the risk associated with ILITs. Request a consultation to learn more about how we can help your team.
