Maryland Life and Health Insurance License Practice Exam

The automatic premium loan provision allows an insurer to withdraw funds from a policy's cash value for which of the following reasons?

1. Future premiums

2. Past due premiums after the grace period

3. Investment fees

4. Contractual penalties

The correct answer is: Past due premiums after the grace period

The automatic premium loan provision is a feature in some life insurance policies that ensures the policy remains in force even if the policyholder fails to pay the premium by the due date. This provision allows the insurer to borrow against the cash value of the policy to cover past due premiums that remain unpaid after the grace period has lapsed. Once the grace period ends and the premium is still unpaid, the insurer can automatically use the available cash value to pay the outstanding premium, thereby preventing the policy from lapsing and maintaining coverage. This means that the insured does not have to provide separate consent for this transaction, as it is outlined in the policy terms. In contrast, options focusing on future premiums, investment fees, or contractual penalties do not align with the purpose of the automatic premium loan provision, which specifically deals with covering unpaid premiums rather than any other financial obligations or charges.