4.2 Payment of Premium Provisions
Mode of Premium
This provision specifies how often premiums must be paid—such as monthly, quarterly, semiannually, or annually—and identifies the party to whom the premiums are payable. Generally, the more frequently premiums are paid, the higher the overall cost. The policyowner has the right to change the premium payment mode.
Grace Period
The grace period is the length of time allowed after a premium due date during which the policy remains in force before it lapses for nonpayment. If the insured dies during this period, the insurer will pay the death benefit, minus any overdue premiums or outstanding loans.
The grace period is typically 30 or 31 days, unless state law provides a different timeframe. When applicable, further details may be discussed in the state law chapter. Although coverage continues during the grace period, the policy will lapse if the premium is not paid before the period expires.
Automatic Premium Loans (APL)
The Automatic Premium Loan provision must be elected by the policyowner and may be canceled at any time. It allows the insurer to automatically borrow against the policy's cash value to pay an overdue premium, thereby preventing the policy from lapsing unintentionally. This provision is available only for policies that accumulate cash value and typically does not require an additional premium.
The Automatic Premium Loan becomes effective at the end of the grace period if the premium remains unpaid. Any premium paid through this provision is treated as a policy loan, and interest will accumulate on the borrowed amount according to the terms of the policy.
Reinstatement
If a policy lapses due to nonpayment of premiums, the policyowner may have the option to restore the coverage through reinstatement. The reinstatement period is typically three years from the date of lapse, although some policies may allow up to five years.
To reinstate the policy, the insured must provide evidence of insurability, and the policyowner must pay all overdue premiums from the date of lapse along with applicable interest.
Reinstatement is intended to place the policy back in force as though the lapse had not occurred. However, once the policy is reinstated, a new incontestability period begins.
Quiz
1. Which statement best describes the Mode of Premium provision?
A. It determines the beneficiary of the policy
B. It specifies how frequently premiums are paid and to whom they are payable
C. It determines the interest credited to the policy
D. It sets the grace period for premium payments
Correct Answer: B
Rationale: The Mode of Premium provision defines the frequency of premium payments (monthly, quarterly, semiannually, or annually) and indicates to whom the premiums are payable. It also allows the policyowner to change the payment mode, although more frequent payments generally increase the total cost.
2. If the insured dies during the grace period, what will typically occur?
A. The claim will be denied
B. The policy will be reinstated automatically
C. The death benefit will be paid minus overdue premiums or loans
D. Only the premiums paid will be refunded
Correct Answer: C
Rationale: Coverage continues during the grace period. If the insured dies during this time, the insurer will still pay the death benefit, but any overdue premiums or outstanding loans will be deducted from the benefit amount.
3. Which type of policy may use the Automatic Premium Loan (APL) provision?
A. Term policies only
B. Cash value policies only
C. Group policies only
D. Annuities only
Correct Answer: B
Rationale: The Automatic Premium Loan provision is available only for policies that accumulate cash value. The insurer may borrow against the cash value to pay overdue premiums and prevent the policy from lapsing.
4. When does the Automatic Premium Loan (APL) provision typically become effective?
A. Immediately when the premium is due
B. At the beginning of the policy term
C. At the end of the grace period if the premium remains unpaid
D. After the policy has lapsed
Correct Answer: C
Rationale: If the premium is not paid by the end of the grace period and the policyowner has elected the APL provision, the insurer will automatically borrow against the policy's cash value to cover the premium payment.
5. Which of the following is generally required to reinstate a lapsed life insurance policy?
A. Proof of beneficiary eligibility
B. Evidence of insurability and payment of overdue premiums with interest
C. Payment of one future premium only
D. Cancellation of the original policy
Correct Answer: B
Rationale: To reinstate a policy that has lapsed due to nonpayment, the policyowner must typically provide evidence of insurability and pay all overdue premiums plus interest. After reinstatement, a new incontestability period begins.