Premium Loan Provision

NAIC Proceedings 1996 1st Quarter 367
SUMMARY CONCLUSION:
3. A policy (or contract) loan shall be defined as a loan to a policyholder, under the provisions of an insurance contract, that
is secured by the cash surrender value of the related policy or contract. Policy loans shall include:
Cash loans including loans resulting from early payment benefits or accelerated payment benefits on contracts when
the terms of the contract specify that such payments are policy loans secured by the policy and interest is charged.
Automatic premium loans, which are loans made in accordance with policy provisions whereby delinquent premium
payments are automatically paid from the cash value at the end of the established grace period for premium payments.


Automatic Premium Loans
An automatic premium loan (APL) is one which is made in accordance with the provision in some policies for
automatically paying a delinquent premium from the cash value at the end of the grace period. A special loan agreement
is not required because the policy owner previously requested the APL option. In some states the policy owner must
specifically elect this provision for it to be effective.
The purpose of the APL provision is that, in the event of inadvertent nonpayment of premium or temporary inability to
pay the premium, the policy is kept in full force. If the policy were allowed to lapse and the nonforfeiture options of
reduced paid-up or extended term insurance were effective, the policy owner would then be required to comply with the
reinstatement procedures, such as furnishing evidence of insurability.


Generally Accepted Accounting Principles
14. The AICPA Audit and Accounting Guide: Stock Life Insurance Companies provides the following guidance in Chapter 4,
Investment Operations:
Policy Loans *
4.13 Life insurance companies generally must permit borrowing against the cash values of policies. Policy loans are
carried at their unpaid balances including accumulated interest but not in excess of cash surrender values or in excess of
policy reserves. Many policy contracts require the company to initiate an "automatic premium loan" to pay delinquent
premiums.