Quatloos!

Yes, it's quite true that a policy in which premiums were paid by Automatic Premium Loan may continue in force after the owner believes the policy was cancelled, even to the point where the loan balance exceeds the premiums paid by the owner. When such a policy actually lapses, that excess will be taxable as Ordinary Income. So one might argue that the policy's lapse "bites" the owner.

But we ought also to consider that (a) in that situation, the policy owner had insurance protection for the entire period and, had he or she died during that period, the policy death benefit (net of the loan) would have been payable to the beneficiary.