Nonforfeiture Options
Nonforfeiture options let an owner use the available value of a cash-value life policy when surrendering it or discontinuing premiums. Available options and net benefits depend on the contract.
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Exam Tip
Cash surrender ends coverage; reduced paid-up generally gives a smaller permanent benefit; extended term gives limited-duration coverage. Check available options and policy-debt adjustments.
What Are Nonforfeiture Options?
A cash-value life policy may have value available when its owner stops paying premiums. Nonforfeiture provisions explain how that value can be used. These are commonly taught using traditional whole life; not every cash-value product offers every option.
Common Whole-Life Options
| Option | Use of available value | Result |
|---|---|---|
| Cash surrender | Pay the net surrender value to the owner | Coverage ends |
| Reduced paid-up | Buy a smaller amount of paid-up permanent insurance | No further premiums for that reduced coverage |
| Extended term | Buy term coverage, commonly for the former face amount subject to debt and contract adjustments | Coverage lasts for the purchased term |
Cash Surrender
Net proceeds reflect any applicable surrender charges and outstanding policy debt. Taxable income may arise when surrender proceeds exceed the adjusted investment in the contract; total premiums alone are not always the correct tax basis.
Reduced Paid-Up and Extended Term
Reduced paid-up coverage preserves a smaller permanent benefit. Extended term preserves coverage for a limited period. The amount or duration comes from the policy's available value, contractual tables and any debt. Do not promise the original full benefit when policy loans or other adjustments apply.
Automatic Premium Loan
An automatic premium loan, if elected and available, borrows against policy value to pay a premium. It is a loan with interest, not a nonforfeiture settlement. Debt can reduce benefits and eventually contribute to lapse.
Before Electing
Ask the insurer for the current net surrender value and available paid-up or term values. Compare benefit duration, charges, loans and tax consequences. Universal life may instead require sufficient value or satisfaction of a no-lapse guarantee to keep coverage active.
Sources: California insurance guide and IRS Publication 525.
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Cash Value
Cash 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
Whole life is permanent life insurance with a contractual death benefit, scheduled premiums and guaranteed cash values if its terms are met. Participating policies may also pay non-guaranteed dividends.
Paid-Up Insurance
Paid-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
Extended 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
Reduced 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.
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