Life Insurance Non-Forfeiture Option (Terms Explained)

For those who hold a permanent life insurance policy, nonforfeiture options are available to protect the insured.

Life happens and sometimes insurance policies need to be surrendered or premiums cannot be consistently paid. Insurance companies want you protected no matter what happens. Read the article to learn more about the meaning of nonforfeiture in an insurance policy.

Find out if you qualify for a life insurance nonforfeiture option. Enter your ZIP code and get a free quote today.

What is a nonforfeiture option in an insurance policy?

For an insured party to have the ability to receive full or partial benefits or a partial refund of premiums after a lapse in their policy, they must have a nonforfeiture clause within their insurance policy.

Under the clause, the insured may have to return some portion of the total premiums paid, the cash surrender value of the policy, or a reduced benefit based upon premiums paid before the policy lapsed.

Read more: How to Reinstate a Lapsed Insurance Policy

A nonforfeiture clause can be in a permanent life insurance policy, long-term disability, and long-term care insurance policies.

The clause was created to protect the insured in case the policyholder stops paying premiums. State law forbids companies from keeping the accumulated cash value and canceling the policy should a policy expire.

How does the nonforfeiture option work?

The nonforfeiture benefit becomes available when the policyholder decides to surrender the policy.

Life insurance policyholders can choose one of four nonforfeiture benefit options: cash surrender value, extended term insurance, loan value, and paid-up insurance.

1. Cash Surrender Value
   • Within six months of the policyholder surrendering the policy, they will be able to receive the accumulated portion of a permanent life insurance policy’s cash value. Depending on the age of the policy, the cash surrender value could be less than the actual cash value.
2. Extended-Term Insurance
   • The extended-term nonforfeiture option allows the policyholder to use the cash value to purchase a term insurance policy with a death benefit equal to that of the original whole-life policy. This allows the policyholder to stop paying the premiums but not forfeit the equity of their policy.
3. Loan Value of Policy Loans
   • The option of a policy loan is not like a regular loan — it does not need to be paid back. Any money that is taken out will be deducted from the death benefit that goes to the policyholder’s beneficiaries. You will be charged between 5% and 9% interest on the loan.
4. Paid-Up Insurance
   • The policyholder will be allowed to receive a lower amount of fully paid whole life insurance, excluding commissions and expenses. The age of the insured will determine the face value of the new policy. The new death benefit will be less than that of the lapsed policy.

If the policyholder does not make a selection, the terms of the policy will generally stipulate which option would go into effect if the policy lapses or is surrendered.

In short, the policyholder has options if they cannot continue to pay the premiums.

The cash surrender guarantees the policyholder their accumulated cash value.

If the policyholder decides on the extended-term insurance option, they are guaranteed the current death benefit of the whole life policy for a set time with no premium payment required.

The reduced paid-up option guarantees a lesser whole life death benefit remains in force for the rest of the insured’s life with no premium payments required.

It will also continue to build up a cash value through the accumulation of guaranteed interest. Also, the payment of life insurance dividends continues if the dividend option is set to paid-up additions.

It is important to note the option to exercise a nonforfeiture benefit only exists if the whole life policy has cash value — some policies have no cash value for the first few years.

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Are there other life insurance nonforfeiture options?

There are two other life insurance nonforfeiture options. But unlike the four options mentioned above, these two are not made available by all insurance companies.

The first is a single-premium, immediate annuity option. The policyholder will be able to convert their policy to an annuity, which will pay the policy owner an amount for the rest of their life. The amount is based on the cash value of the lapsed or surrendered policy and the policy owner’s age.

The other option is an automatic premium loan. The cash value will allow the insurer to automatically deduct the premium amount overdue from the policy value. This is the insurance company making a loan against the policy’s cash value. (For more information, read our “Life Insurance Automatic Premium Loan Provision (Terms Explained)“).

The nonforfeiture benefit is available only for permanent life insurance policies. If you have a term life insurance policy or universal life insurance policy and you’re looking for a nonforfeiture option, then your best step to take is a 1035 exchange option.

As long as you are in good health and under the age of 80, you may exchange your term insurance policy for another term insurance policy with a level premium, or a permanent life insurance policy with a level premium. The only stipulation is that the insured of the old policy is the same person insured under the new policy.

Find nonforfeiture options in your life insurance policy. Enter your ZIP code and get a free quote today.

Read more: Extended-Term Life Insurance

Case Studies: Nonforfeiture Options in Life Insurance Policies

Case Study 1: John’s Whole Life Insurance Policy

John holds a whole life insurance policy for the past 15 years. Unfortunately, due to financial difficulties, he finds it challenging to continue paying the premiums. In this scenario, the nonforfeiture clause in John’s policy comes into play.

As a result, John has the option to choose the cash surrender value, extended term insurance, reduced paid-up insurance, or a loan against the policy’s cash value. Each option offers different benefits and considerations, providing John with the flexibility to make an informed decision.

Case Study 2: Sarah’s Universal Life Insurance Policy

Sarah has a universal life insurance policy and has diligently paid the premiums for several years. However, she decides that she needs to discontinue the policy due to changing financial circumstances. In this situation, Sarah explores the nonforfeiture options available to her.

Since universal life insurance policies typically accumulate cash value, Sarah can choose between the cash surrender value, extended term insurance, reduced paid-up insurance, or other options specified in her policy. By exercising a nonforfeiture option, Sarah can still derive value from her policy despite discontinuing premium payments.

Case Study 3: Michael’s Long-Term Disability Insurance Policy

Michael holds a long-term disability insurance policy, which includes a nonforfeiture clause. Unfortunately, he becomes unable to work due to a severe disability, leading to a lapse in his policy.

However, thanks to the nonforfeiture option, Michael can receive partial benefits or a refund of premiums paid before the policy lapsed. This provision provides a safety net for individuals like Michael, ensuring some financial protection in case of unexpected circumstances.

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