Washington Life Producer Practice Exam

What does the automatic premium loan provision authorize an insurer to do?

1. Withdraw from policy dividends

2. Withdraw from cash value for past due premiums

3. Cancel the policy after a grace period

4. Reduce the premium amount

The correct answer is: Withdraw from cash value for past due premiums

The automatic premium loan provision allows insurers to withdraw from the cash value of a policy to cover any past due premiums. This provision is particularly important in whole life insurance policies, where a cash value accumulates over time. If a policyholder fails to pay their premium by the end of the grace period, instead of allowing the policy to lapse, the insurer can automatically take a loan against the cash value to pay the overdue premium. This helps ensure that the policy remains in force, even if the policyholder encounters temporary financial difficulties. This provision benefits both the policyholder, by providing a safety net, and the insurer, by maintaining the contractual relationship and cash flow from the policy. It is essential to note that the amount withdrawn as a loan will accumulate interest and may affect the policy's death benefit if not repaid, but the primary function is to keep the policy active during financial hardships.