Nonforfeiture Options
Nonforfeiture options are provisions in permanent life insurance policies that allow policyholders to access accrued cash value if they stop paying premiums, rather than forfeiting all benefits.
Exam Tip
Three main options: Cash Surrender, Reduced Paid-Up, Extended Term. Extended term keeps the SAME death benefit for a LIMITED time.
What Are Nonforfeiture Options?
Nonforfeiture options protect policyholders who can no longer pay premiums on their permanent life insurance policy. Instead of losing everything, these options let you access the cash value you've built up over the years.
Standard Nonforfeiture Options
| Option | What Happens | Death Benefit |
|---|---|---|
| Cash Surrender | Receive lump sum cash value | Policy terminates |
| Reduced Paid-Up | Keep permanent coverage at lower amount | Reduced, but guaranteed |
| Extended Term | Convert to term insurance for original face amount | Original amount, limited time |
Cash Surrender Value
- Receive the accumulated cash value minus any surrender charges
- Policy completely terminates
- May have tax consequences if cash value exceeds premiums paid
Reduced Paid-Up Insurance
- Use cash value to purchase a smaller permanent policy
- No more premiums required ever
- Coverage continues for life at reduced amount
- Still builds cash value
Extended Term Insurance
- Convert to term insurance for the original death benefit amount
- Length of term depends on cash value
- No more premiums required
- Coverage ends when term expires (if still living)
Automatic Premium Loan
While not technically a nonforfeiture option, many policies include:
- Automatically borrows from cash value to pay premiums
- Keeps policy in force until cash value depleted
- Interest charged on loans
Choosing the Right Option
| If You Want... | Choose... |
|---|---|
| Maximum cash now | Cash Surrender |
| Lifetime coverage | Reduced Paid-Up |
| Original death benefit | Extended Term |
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Related Terms
Cash Value
InsuranceCash value is the savings component of a permanent life insurance policy that grows tax-deferred and can be accessed through loans or withdrawals during the policyholder's lifetime.
Whole Life Insurance
InsuranceWhole life insurance provides permanent death benefit protection with guaranteed cash value accumulation, level premiums, and coverage that lasts your entire life.
Paid-Up Insurance
InsurancePaid-up insurance is a life insurance policy that requires no further premium payments because the cash value has grown enough to cover all future costs, or it was purchased as a nonforfeiture option.
Extended Term Insurance
InsuranceExtended term insurance is a nonforfeiture option that uses the cash value of a permanent life insurance policy to purchase paid-up term insurance for the same face amount, lasting as long as the cash value allows.
Reduced Paid-Up Insurance
InsuranceReduced paid-up insurance is a nonforfeiture option that uses a policy's cash value to purchase a smaller permanent life insurance policy that is fully paid up, with no further premiums required but a reduced death benefit.