FAQ: How do nonforfeiture options work?

Kendra_Solis

What happens when a policy owner can no longer afford their premiums?

Nonforfeiture options are designed to protect the equity built within a policy. Here is a breakdown of the three ways a policyowner can 'use' their existing cash value rather than just losing it.

How do nonforfeiture options work?

Nonforfeiture provisions ensure that a policy owner does not lose the equity built in a permanent policy if they stop paying premiums. There are three primary options:

1. Cash Surrender: The policy owner cancels the policy and receives the cash value in a lump sum. Coverage ends immediately.
2. Reduced Paid-Up: The cash value is used as a single premium to buy a smaller "paid-up" version of the same policy. It lasts for the insured’s lifetime (to age 100/121), but the death benefit is lower than the original.
3. Extended Term: The cash value buys a term policy with the same death benefit as the original policy, but only for a specific period of time.

Exam Tip: Extended Term is typically the "automatic" or default option if the policyowner makes no choice. It provides the highest death benefit but for the shortest duration.