Final answer:
When a policyholder frequently opts for automatic premium loans to pay their life insurance premiums, the cash value of their policy will decrease until it is completely depleted, at which point the policy will terminate.
Step-by-step explanation:
If an insured continually uses the automatic premium loan option to pay the policy premium, the policy will eventually terminate when the cash value is reduced to nothing. This option allows policyholders to cover their premium payments by taking a loan against the cash value of their life insurance policy. As premiums continue to be paid through loans, the cash value decreases, and if it hits zero, the policy ends.
It is also important to note that the use of the automatic premium loan option does not change the premium amount; insurance companies may not necessarily increase the premium if loans are utilized. However, there could be a different effect if a company decides to charge an actuarially fair premium to all policyholders collectively—potentially resulting in higher-risk policyholders causing financial losses for the insurer, which might encourage the company to increase premiums across the board, and thereby discourage lower-risk customers from maintaining their policies.