PSI Ohio Insurance Practice Exam

Which of the following is an automatic premium loan provision?

1. Paying cash value for lapsed premiums

2. Subtraction of premium due from cash value

3. Automatic renewal at maturity date

4. Freezing the premiums during illness

The correct answer is: Subtraction of premium due from cash value

The automatic premium loan provision allows a policyholder to use the accumulated cash value of a life insurance policy to cover the premium due when the policyholder fails to pay it. This means that if the premium is not paid by the due date, the insurer will automatically take a loan against the cash value of the policy to ensure that the coverage remains in force without requiring additional action from the policyholder. When a policyholder chooses this option, the amount of the unpaid premium is subtracted directly from the cash value of the policy. This provision helps prevent the policy from lapsing, ensuring the policyholder can retain their coverage even if they are temporarily unable to pay the premium out of pocket. In contrast, the other options do not accurately represent the concept of an automatic premium loan. Paying cash value for lapsed premiums suggests a different transaction, while automatic renewal at the maturity date involves renewing the policy rather than covering a premium through an automatic loan. Freezing premiums during illness refers to a different provision designed to protect policyholders during health crises rather than using cash value to pay premiums. Therefore, the correct understanding aligns with the automatic premium loan provision as outlined in option B.