When the policy owner selects the nonforfeiture extended term option, the cash value can be used to acquire a term insurance policy with a death benefit equal to the original whole-life policy. The policy’s cost is determined by the insured’s current age. The term insurance expires after a set number of years, which is specified in the nonforfeiture table. When relinquishing a whole life insurance policy, this choice may be automatic for some carriers.
Life insurance is a contract,
where you agree to pay the insurance company the policy premiums, and the insurance company agrees to pay the death benefit you’ve chosen to your specified beneficiary if the benefit is payable pursuant to the policy’s requirements. Life insurance contracts, like any other legal contract, include regulations and terms that vary based on the type of policy you choose.
People occasionally fail to pay their life insurance premiums. Some policies have a grace period after which they terminate, but if the policy has cash value, state law prohibits insurance firms from terminating the policy and keeping the cash value. 4
A non-forfeiture option
(or clause) is a provision in some life insurance plans that states that if the policy fails after a set length of time owing to missed premium payments, the policyholder would not lose the value of the policy. When the holder of some life insurance plans surrenders (actively cancels) the policy, the nonforfeiture clause may become available. 5 Consider the implications of terminating your initial insurance, which also eliminates the policy’s death benefit.
In the non-forfeiture clause of most whole life insurance contracts, there are three basic payout alternatives.
Cash Surrender Value
If the policyholder opts for cash surrender, the insurance company pays the cash value in one lump amount to the policyholder. The insurance is terminated and cannot be reactivated at that time, and the insurer’s obligation under the contract ceases. Most jurisdictions allow insurance providers to pay the cash surrender value for up to six months. 6
Extended-Term Option
This option allows the policy owner to use their policy’s cash value to purchase extended term insurance. This option also allows the policyholder to stop paying the previous policy’s premiums. 5 The cash values available from the insurance will determine how long the new policy will be in effect. 5 A policy that has been converted to term insurance may be resumed under the contract’s reinstatement provision if the term has not yet expired. 4
Reduced Paid-Up Insurance
If you select this option, the cash value of the policy will be utilized to purchase a paid-up policy of the same type as the one that lapsed. The policyholder does not have to pay any further premiums. The new policy will have a lower death benefit but will have a cash value that will rise at a slower rate throughout the policy’s term. 5
If the policyholder does not choose an option, the insurance company will use the default option specified in the policy. The insurance company’s default option is frequently the Extended Term Option.
Other non-forfeiture solutions are available, but not all insurance companies offer them.
Single-Premium, Immediate Annuity
Some insurance firms will also let you to convert your coverage to an annuity, which would pay you a fixed amount for the rest of your life. The amount is determined by the monetary value of the lapsed or surrendered insurance as well as the age of the policy owner. 4
Automatic Premium Loan
An automatic premium loan is a provision in a cash-value life insurance policy that permits the insurer to take the overdue premium amount from the policy value automatically. If the cash worth of the policy is more than or equal to the amount owing in premiums, the insurance company will make a loan against it to pay the late premiums. 7
If you find yourself in a situation where you can’t or don’t want to pay the premiums on a cash-value life insurance policy, one of the non-forfeiture choices may be a good option for you. Keep in mind that non-forfeiture options, such as decreasing the face value or canceling the policy entirely, may have a detrimental effect on some coverage. Your insurance agent can assist you in weighing the benefits and drawbacks so that you can make the best decision for you.
- The Corporate Finance Institute is a non-profit organization dedicated to advancing What is an Automatic Premium Loan, and how does it work? (Retrieved on January 26, 2021)
What is extended term insurance coverage?
Extended Term Insurance is a nonforfeiture clause in a whole life policy that allows you to use the cash value to buy term insurance equivalent to the amount of life insurance you already have.
What is an example of a Nonforfeiture option?
Cash surrender value, extended term insurance, loan value, and paid-up insurance are the four nonforfeiture reward alternatives available to life insurance policyholders. You can choose lesser coverage for the remainder of the policy’s term and avoid paying any future premiums. (i.e., a fully paid-up insurance.)
What is the benefit of choosing extended term as a Nonforfeiture option quizlet?
What are the advantages of a nonforfeiture option like extended term? It provides the most insurance coverage: the face amount is the same as the original policy, but for a shorter period of time.
What reduced paid up insurance is as a Nonforfeiture option?
Nonforfeiture Reduced Paid-Up Benefit a nonforfeiture benefit that allows you to use the cash surrender value of your life insurance policy to buy a fully paid-up life permanent insurance policy for a lower premium. Reduced paid-up insurance is another name for it.
What is a Nonforfeiture value?
Nonforfeiture Values benefits that accrue to the insured when the policy terminates due to nonpayment of premiums in whole life insurance plans. These rewards are usually either a cash surrender value or a paid-up term life insurance sum.
Which Nonforfeiture option is the automatic option?
Which of the non-forfeiture options is “automatic”? The insurer will automatically activate the extended term option if the policyowner cannot be found, premium payments have stopped, and the policy’s cash value has been depleted.