Massachusetts Life Producer Practice Exam

What provision allows the cash value of a life insurance policy to keep the policy in force following a premium default?

1. Grace period provision.

2. Automatic premium loan.

3. Reinstatement provision.

4. Non-forfeiture option.

The correct answer is: Automatic premium loan.

The automatic premium loan provision is designed to protect the policyholder in the event of a premium default by keeping the policy in force. When a policyholder fails to pay their premium before the end of the grace period, this provision allows the insurer to use the accumulated cash value of the policy to automatically pay the premium. This ensures that the policy remains active and the coverage continues without interruption, even if the premium payment has not been made. This feature is particularly beneficial because it can prevent the sudden lapse of coverage, which might occur if the policyholder forgets to pay the premium or faces financial difficulties. It essentially acts as a safeguard for the policyholder, giving them an additional layer of financial protection regarding their life insurance policy. In other contexts mentioned, such as the grace period provision, this merely allows for a time frame to make the premium payment without penalty or loss of coverage, rather than utilizing the cash value to pay the premium. Reinstatement provision refers to the process of resuming coverage after it has lapsed, while non-forfeiture options provide different ways to utilize the cash value upon policy lapse, but do not automatically keep the policy in force by covering the premium.