What Is a Nonforfeiture Option?

A nonforfeiture option in a permanent life insurance policy has the purpose of protecting the consumer in case something were to happen, such as surrendering the policy or being unable to pay premiums. If you have a nonforfeiture option in your policy, you can choose from four different benefits. These include a cash surrender value, extended-term insurance, loan value of policy loans, and paid-up insurance. There is also an immediate annuity and automatic premium loan option, but these are not offered by every insurance company.

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Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in...

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Benjamin Carr was a licensed insurance agent in Georgia and has two years' experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.

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Reviewed by Benji Carr
Former Licensed Life Insurance Agent

UPDATED: Jan 7, 2022

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Quick Facts

  • A nonforfeiture clause can be found in a permanent life insurance policy, long-term disability, and long-term care insurance policies
  • It was created to protect the insured in case the policyholder stops paying premiums
  • Policyholders can choose from four different nonforfeiture benefit options: cash surrender value, extended-term insurance, loan value, and paid-up insurance

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 nonforfeiture option. Enter your ZIP code and get a free quote today.

What is a nonforfeiture clause 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.

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 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 nonforfeiture options?

According to American Income, there are two other 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.

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.

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