What are Nonforfeiture Options?
Nonforfeiture options are specific features in permanent life insurance policies, such as Whole Life or Indexed Universal Life insurance, that allow policyholders to retain some form of benefit or cash value if they discontinue premium payments. This can be especially helpful for individuals who no longer wish to or can’t afford to maintain full coverage but still want to avoid forfeiting all the benefits they have accumulated.
When a policyholder decides not to continue with premium payments, they are typically presented with several nonforfeiture options:
- Cash Surrender Value: This option allows the policyholder to receive the accumulated cash value of their policy as a lump sum. The policyholder effectively terminates the policy, and coverage ends. This option is often chosen when immediate funds are needed or when there’s no longer a need for insurance coverage.
- Reduced Paid-Up Insurance: With this option, the policyholder can stop paying premiums in exchange for a smaller death benefit that remains in effect for the rest of their life. This is a good option for individuals who want some level of continued coverage without further payments.
- Extended Term Insurance: In this option, the policy’s cash value is used to purchase term insurance coverage for the full original death benefit amount for a certain period. Coverage will continue until the term expires, at which point it ends. This option is typically chosen by policyholders who want to maintain their full death benefit for as long as possible without ongoing premium payments.
- Loan Options: Some policies also allow the policyholder to borrow against the cash value, providing an additional means of accessing funds while keeping the policy in force. However, this is more a cash access feature than a direct nonforfeiture option.
Nonforfeiture options provide flexibility and preserve some benefits of a policy even if the policyholder no longer can pay premiums. They are particularly useful for long-term planning, as they ensure that accumulated value is not entirely lost, providing a sense of security to the policyholder or their beneficiaries.