The insurance company is entitled to receive the premium payment in cash, but it may agree to accept any valuable property in lieu of cash, unless prohibited by state law. The payment of premiums by any method other than cash, check, credit, or policy loans is generally prohibited.

The insurance application and contract can prescribe the acceptable methods for payment of the premiums. Usually, however, these documents do not prescribe any particular method. Currently, the most common method is by cash or check.

At one time it was not unusual for premiums to be paid by an exchange of services. Because this too easily lends itself to rebating, however, some states have prohibited this form of premium payment, and it is no longer a generally accepted practice. (By placing an excessive value on the services rendered, an insurance company could in effect refund a portion of the premium due, thereby providing a rebate.)

Promissory notes, which are based on the policyowner�s creditworthiness, were once an acceptable form of premium payment for both initial and renewal premiums, but this is no longer an accepted practice. The use of promissory notes to pay the initial premium raised a question of law about the existence of the contract if the promissory note was not honored at its maturity. Some court decisions held that the insurer�s unconditional acceptance of the promissory note meant that the premium had been paid even if the policyowner later defaulted on the note. Despite the default, the insurer was not permitted to declare the policy void from inception for nonpayment of the premium. The insurer�s only remedy then was to sue the policyowner for payment based on the promissory note. As a result, insurers were unwilling to accept a promissory note unconditionally as payment of a premium.

Today, few insurers will accept a promissory note to pay the initial premium, and it is rare for an insurer to accept a promissory note to pay a renewal premium. If an insurer accepts a promissory note at all, it will accept it only on the condition that the note must be paid when it comes due. If it is not paid at that time, the insurer can treat the premium as unpaid. If the note was taken for the initial premium, the insurer can declare the policy void. If the note was taken for a renewal premium, the default will permit the insurer to lapse the policy for nonpayment of premium.

Insurance companies used to promote the sale of insurance through financing programs targeted toward college seniors and graduate school students. In effect, the policyowner would borrow money from the insurance company (but not via a policy loan) to purchase insurance from the company. Since it was expected that the policyowner would soon finish his or her education, the loan would be repaid out of the student�s anticipated much higher income upon graduation. A key to the success of these college student financing plans was the federal income tax deduction for the interest incurred on the loans. When that deduction was eliminated in a revision to the federal tax law, these plans stopped being attractive to most people and were discontinued even though the financing plans are still permissible by law.

Insurance companies do not usually extend forms of credit to policyowners other than those discussed here. The provisions in the application and the policy that limit the agent�s power to amend the contract or to bind the insurer also prevent the agent from extending credit on behalf of the insurance company. It sometimes happens, however, that the insurance agent will pay the premium and extend credit to an applicant or policyowner. In this event, the policy will be in effect and the agent will have a right of action against the policyowner or applicant if the debt to the agent is not paid.

Currently, the most common method of premium payment is by check from an individual or a business. (Payment of the premium by cash is common for debit insurance, although that form of insurance is not of great significance today.) Although checks for insurance premiums are readily accepted by insurance companies, they are technically accepted only as conditional payment (somewhat like a promissory note). This means that the actual crediting of the premium payment is conditioned on whether the bank upon which the check is drawn honors the check when it is returned for payment. If the check is not honored by the bank for any reason, the insurance company will treat the premium as being unpaid. Depending on the terms of the contract and the policyowner�s payment history, this may result in an automatic premium loan, a reduction in the cash accumulation account, or a lapse of the policy that releases the insurer from its obligations under the contract.

Payment by preauthorized check is a form of payment that is only slightly different from the regular check payment process. Preauthorized check plans have been in use for many years. Under these arrangements, the policyowner gives the insurance company the right to order the withdrawal of the premium payment (usually on a monthly basis) directly from the policyowner�s checking account. The policyowner also authorizes his or her bank to pay the insurance premiums upon receipt of the insurer�s order. (To induce the banks to participate in these plans, there has to be an agreement between the bank and the insurer that obligates the insurer to indemnify the bank for any liability it might incur when making a withdrawal from an account pursuant to an insurer�s order.)

Except that the premium is paid without the policyowner�s direct participation in each payment, payments by preauthorized check plans are treated just like regular check payments�that is, they are conditional upon actual payment. If the insurer�s order under a preauthorized check plan is not honored by the bank, the premium has not been paid.

A company may decide to accept a check as an unconditional payment of the premium. While this rarely occurs, it could result if the company issued a premium receipt in exchange for the policyowner�s check that expressly provided that the receipt of the check constituted payment. If the issuing bank subsequently dishonored the check, the insurer could not treat the premium as being unpaid but would have to assert its rights to payment of the debt based on the terms of the unconditional premium receipt. However, the presumption is that acceptance of a check is conditioned upon the check being cashed. Moreover, most premium receipts are conditional and do not permit this consequence. The language in this premium receipt for the initial premium completely avoids the problem:

When a check is offered in payment of a premium, the insurer has an obligation to promptly deposit the check. If the bank does not honor the check, the insurance company has an obligation to promptly advise the policyowner and to return the dishonored check. This is in the best interests of both the insurer and the policyowner because it gives the policyowner a chance to make a proper premium payment before the grace period and any extensions of time for payment expire. If a premium check is given to the insurer before the due date but is dishonored after the grace period has expired because of the insurer�s delay in presenting it for payment, the insurer may be required to give additional time for payment or to perform its obligations under the contract if the insured dies.

An electronic funds transfer is a form of payment that shares some of the characteristics of both a cash and a check payment. In some cases, a policyowner may use a telephone or computer modem connection to authorize a transfer of funds to his or her insurer for each premium payment as the premium comes due. In other situations, the policyowner might sign an authorization form directing the bank to automatically transfer the funds to the insurer at specified intervals (usually monthly). This latter method is similar to the preauthorized check plan that is discussed above. Regardless of whether a preauthorization form is signed, this method also has the characteristics of a cash transaction: If the money is available in the policyowner�s account to be electronically transferred on the specified date, the transaction is complete and the premium paid. If the money is not available, the premium has not been paid and there is no question of a conditional payment before a check clears.

As a protection to the insurer and the policyowner against an inadvertent lapse of the policy, most cash value life insurance policy contracts have an automatic premium loan provision. Some provisions are short and simple, as shown in the first example below; others are not, as shown in the second example:

Because it keeps the policy in force, the automatic premium loan also retains any riders, such as accidental death and disability. If the policy were to lapse, such riders would not be continued in force under the nonforfeiture options. This provision is also better for the policyowner than attempting to reinstate a lapsed policy because the automatic premium loan does not require new evidence of insurability. On the other hand, like policy loans in general, the automatic premium loan reduces the policy�s cash values and increases the cost of maintaining the policy by the amount of the additional interest owed to the insurer. This reduction in policy value may cause the policy to terminate early.

Other features of the automatic premium loan provision are well summarized as follows:

Life insurance policies that pay dividends offer the policyowner a variety of options for the use of that dividend. The application for participating policies has a section where the applicant is asked to select the dividend option he or she desires. The four basic dividend options are to

If the policyowner elects the second dividend option, the insurer will use the dividend to pay all or a portion of the premium and send the policyowner a premium notice for any balance due.

Some companies do not offer all of these options. These companies generally give the policyowner the choice between taking the dividend in cash or using it to purchase paid-up additional insurance. Regardless of the number of options, if the policyowner does not choose one, the insurer will select one by default. Most insurers will not select the option that uses the dividend to pay premiums but will apply dividends to the purchase of paid-up additions.

Many insurance companies offer a fifth dividend option, which applies the dividend to purchase one-year term insurance in varying amounts (for example, equal to the policy cash value, the face amount of the policy, or the total premium). Any dividend amount left over after being used for the fifth dividend option is applied as directed by the policyowner under one of the first four dividend options. The alternatives under the fifth dividend option were created to maintain the death benefit when it was expected that the policyowner would be using policy loans to finance the policy and thereby reducing the death benefit by the amount of the policy loans.

The policyowner may change the dividend election under whatever terms the insurance company prescribes in the policy. Companies generally require only that the policyowner sign and deliver a written notice of the desired change to the insurer�s home office.

The dividend election gives the policyowner a contractual right that the insurance company is obligated to respect once that right has been exercised. This means that if the policyowner has made a dividend election (for example, has told the insurer to send the dividends on his or her policy to the policyowner in cash), the insurance company cannot elect to use a dividend to pay premiums even if the grace period is about to expire for nonpayment of premium. This is so even if the dividend would be more than sufficient to pay the premium and keep the policy in force. If the policyowner has not selected a dividend option, however, and the insurer has dividends sufficient to pay the past-due premium, it has been held that the insurer must apply those dividends to the premium to prevent a forfeiture.

Even if the insurer may (or must) use the dividends to pay a premium, the insurer is not obligated to make a partial payment on the premium due unless it has previously agreed to do so. In these circumstances, if the dividend available for premium payment is sufficient to pay the premium under the mode then in effect (monthly, quarterly, or annually), it will be used for that purpose. If it is insufficient to meet the payment due under the current mode, the insurer is under no obligation to change the mode to match the available dividend.

Under some circumstances policyowners want to pay two or more annual premiums in advance of the date on which they are due. While insurers are willing to accept such advance premium payments, some limitations are imposed and several issues arise that must be resolved.

The normal industry practice is to accept prepaid premiums for up to 20 years in advance. The first issue to resolve is the amount of the discount to give for the premiums paid in advance of the due date. The discounted prepaid premium payable will be defined in the receipt from the insurer and will represent the present value (at an interest rate the insurer selects) of the stream of premium payments scheduled to be paid under the policy. The company will usually specify the interest rate to be paid on the prepaid funds, the tax consequences to the policyowner, when and how any of the money may be withdrawn, and what happens to the money if the policy is surrendered or if the insured dies during the period for which premiums were prepaid.