Final answer:
The automatic premium loan provision uses the cash value of a cash-value life insurance policy to pay unpaid premiums, ensuring the policy remains in force and does not lapse.
Step-by-step explanation:
The automatic premium loan provision in a life insurance policy is an option that helps to keep the policy in force. It works by automatically using the policy’s cash value to pay any unpaid premiums if the policyholder fails to make a premium payment within the grace period. This feature ensures that the policy does not lapse due to non-payment, thus maintaining the protection it offers.
Cash-value life insurance policies have both a death benefit and a cash value component. The cash value can accumulate over time and be used by the policyholder in various ways, one of which is to cover unpaid premiums via the automatic premium loan provision. The provision is designed to protect the policyholder from unintentionally losing coverage, but it is important to understand that a loan taken against the cash value accrues interest and can reduce the overall death benefit if not repaid.