-
A
A provision requiring the insurer to lend money to all policyholders at no cost
-
B
An optional provision that automatically borrows from the policy's cash value to pay a premium that would otherwise be unpaid — preventing the policy from lapsing while creating a policy loan balance
-
C
A provision requiring the agent to pay premiums on behalf of the client
-
D
A rider that increases the premium automatically each year
Why this is the answer
THE AUTOMATIC PREMIUM LOAN (APL) provision prevents unintentional policy lapse by automatically taking a policy loan to cover an unpaid premium when the cash value is sufficient. HOW IT WORKS: If a premium is due and the owner does not pay it within the grace period, the APL provision (if elected) automatically borrows from the cash value to pay the premium; the policy remains in force; a policy loan balance is created and accrues interest; as long as the cash value minus the loan balance exceeds the current policy charges, coverage continues; WHEN IT HELPS: For a temporarily cash-strapped owner who forgets to pay a premium; the policy doesn't lapse — it buys time; WHEN IT HURTS: If the owner permanently stops paying premiums, the APL keeps borrowing until the loan plus interest equals the cash value — then the policy lapses with a potential tax bill if the loan exceeds the owner's cost basis; ELECTIVE PROVISION: APL must typically be elected — it is not automatic unless chosen at application or later in the policy; owners who do not want loans accumulating may prefer to NOT elect APL; DIFFERENT FROM REDUCED PAID-UP: The nonforfeiture option of reduced paid-up insurance buys a smaller, paid-up permanent policy with no further premiums — APL maintains the full face amount but creates a growing loan.
Source: Life Insurance License Exam, Automatic Premium Loan Provision