Final answer:
The incorrect statement regarding the automatic premium loan (APL) provision in cash value life policies is that the APL does not reduce the death benefit. It can reduce the death benefit if the loan, plus accrued interest, is not repaid. Additionally, policyholders must initiate this provision; it is not automatic.
Step-by-step explanation:
The automatic premium loan (APL) provision is an option available in certain types of life insurance policies with cash value, such as whole life insurance. Its purpose is to prevent a policy from lapsing due to nonpayment of premiums by automatically using the policy's accumulated cash value to cover unpaid premiums. However, this feature needs to be properly understood regarding its impact on the policy's benefits and the policyholder's responsibilities.
To address the given statements regarding the APL provision:
- The automatic premium loan does indeed reduce the death benefit of the policy if it is not repaid because the loan amount, plus interest, will be deducted from the death benefit upon the policyholder's death.
- The policyholder must opt into the APL provision; it is not automatically included and requires the policyholder's initiation.
- Indeed, only policies that build cash value can qualify for the APL provision because term life insurance, for example, does not accumulate cash value over time.
- If the APL is automatic and the cash value falls to zero, the policy will indeed lapse, which means that there would be no more coverage or death benefit payable.
Based on these points, the statement that is incorrect and does not apply to the APL provision is: 'The automatic premium loan does not reduce the death benefit of the policy.' This is false because the loan amount, if not repaid, will reduce the death benefit.