Paying Premiums & Accessing Value

CARD T123

Premium Mode

The frequency of premium payments. Monthly, quarterly, and annual payments are different modes.

How it works

Premium mode is payment frequency: annual, semiannual, quarterly, or monthly. Compare the total paid over a year, because more frequent installments may include additional charges. Mode does not describe the policy’s face amount or whether premiums are level, flexible, or payable for a limited number of years. [2] [19]

EXAMPLE

An annual premium is $1,200, while monthly payments are $105. The monthly mode costs $1,260 over the year, or $60 more.

Key distinction

A smaller individual installment does not necessarily mean a lower annual cost.

Practice Premium Mode · 3 questions

CARD T124

Automatic Premium Loan

A policy feature using available loan value to pay an overdue premium. The resulting debt accrues under policy loan terms.

How it works

When elected and supported by enough loan value, an automatic premium loan borrows against the policy to pay an overdue premium at the point specified in the contract. It helps prevent lapse but creates debt and interest. It is not available on ordinary term insurance without cash value, and it cannot continue indefinitely after available value is exhausted. [3]

EXAMPLE

A $600 overdue premium is paid by an automatic loan. Coverage continues, but $600 plus applicable interest becomes policy debt.

Key distinction

Automatic premium loans pay premiums with borrowed value. Waiver riders waive covered charges after a qualifying event.

Practice Automatic Premium Loan · 3 questions

CARD T125

Policy Loan

Borrowing against a life policy’s available loan value. Unpaid debt and interest can reduce benefits or contribute to lapse.

How it works

A policy loan uses the policy’s available loan value as security. Interest accrues, and unpaid debt ordinarily reduces surrender proceeds or the death benefit. If debt grows too large, the policy can lapse and create taxable gain. Loans from a non-MEC policy generally are not taxable while the policy remains in force; MEC loans are subject to different distribution rules. [2] [12]

EXAMPLE

A policy otherwise would pay $150,000 at death. Outstanding loan principal and interest total $12,000, leaving $138,000 before any other adjustments.

Key distinction

A loan is debt; a withdrawal permanently takes value out without a loan balance. Neither is automatically free of all consequences.

Practice Policy Loan · 3 questions

CARD T126

Partial Surrender

Taking out part of a policy’s available value. The withdrawal may reduce cash value and the death benefit.

How it works

A partial surrender, or withdrawal, removes part of a policy’s value while leaving some coverage in force. It may reduce the death benefit and may incur charges. Unlike a loan, the withdrawn amount is not a debt accruing loan interest. For a non-MEC policy, withdrawals generally recover investment in the contract first, but exceptions and special rules can apply; MEC distributions generally take gain first. [12]

EXAMPLE

A permitted $2,000 withdrawal reduces a $20,000 account value to $18,000 before fees or other adjustments. The contract determines the effect on the death benefit.

Key distinction

Keeping the policy in force does not mean the withdrawal leaves all values and benefits unchanged.

Practice Partial Surrender · 3 questions

CARD T127

Surrender Charge

A charge for withdrawing or surrendering value under specified conditions. Charges often apply during an initial contract period.

How it works

A surrender charge is a contractual fee for surrendering a policy or taking certain withdrawals, often during early years. The schedule may decline over time. It reduces the amount received; it is not the same as income tax or a policy loan balance. Not every withdrawal is necessarily subject to a charge. [1] [7]

EXAMPLE

A policy has $15,000 in value and a $1,500 applicable surrender charge, with no loans. The surrender proceeds are $13,500 before any tax consequences.

Key distinction

Account value and the amount available after surrender charges can differ.

Practice Surrender Charge · 3 questions

Sources & further reading

Original explanations and practice scenarios informed by the following regulatory, legal, and product resources. State examples are not presented as nationwide deadlines or requirements.