Samuel bought a permanent life insurance policy many years ago.

An automatic premium loan is the best fit because Samuel needs to relieve his immediate premium-payment pressure while retaining the existing permanent policy.

An automatic premium loan uses available policy cash value as security for a loan that pays overdue premiums, thereby preventing the permanent policy from lapsing. The Canadian Life and Health Insurance Association identifies this specifically as a permanent-life-policy feature and a non-forfeiture mechanism. Canadian permanent-policy documentation likewise explains that the feature keeps the policy in force by financing premiums from accumulated cash value.

Reduced paid-up insurance would eliminate future premiums and preserve permanent coverage, but the amount of insurance would be reduced. That conflicts with Samuel's need to retain his existing level of protection for his minor children. Extended term insurance generally preserves the original face amount only for a limited term and therefore sacrifices the permanent nature of the coverage. Cash surrender terminates the insurance altogether.

The automatic premium loan should still be monitored closely because interest accumulates and outstanding indebtedness reduces the net amount ultimately payable and can eventually threaten the policy if cash value becomes insufficient.

FPII reference/topic: Insurance Planning — permanent insurance; cash value; non-forfeiture options; automatic premium loans.

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