How Does a Nonforfeiture Clause Work?
When a policyholder stops paying premiums, the nonforfeiture clause prevents them from losing all the value accumulated in the policy. Instead, the clause provides several options for the policyholder to utilize the policy's cash value (the accumulated savings component of certain life insurance policies).
What are the Different Types of Nonforfeiture Options?
There are three main types of nonforfeiture options:
Cash Surrender Value: The policyholder receives a lump sum payment equal to the policy's cash value, minus any surrender charges. However, this option terminates the policy and eliminates the death benefit.
Reduced Paid-Up Insurance: The cash value is used to purchase a new, smaller life insurance policy with the same type of coverage. This new policy has a reduced death benefit but requires no further premium payments.
Extended Term Insurance: The cash value is used to purchase a term life insurance policy with the same death benefit as the original policy. This option provides coverage for a specific term (period), determined by the amount of cash value available.
Which Insurance Policies Typically Have Nonforfeiture Clauses?
Nonforfeiture clauses are most commonly found in permanent life insurance policies, such as whole life and universal life. Some long-term care insurance policies may also include nonforfeiture provisions.
How Do I Choose the Best Nonforfeiture Option?
The best option depends on your individual circumstances and financial goals. Consider factors such as your need for immediate cash, desire for continued insurance coverage, and age. Consulting with a financial advisor or insurance professional can help you make an informed decision.
If seeking a licensed professional, consider our services. Our insurance advisors and client support team are here to assist you with your insurance needs.
This guide has offered a comprehensive overview of nonforfeiture clauses. For those seeking to deepen their understanding, we recommend exploring our guide on life insurance, which dives into the different types of life insurance policies and their features in greater depth.
