Legal Definitions - nonforfeiture option

A nonforfeiture option is a protective provision found in most whole life insurance policies. It ensures that a policyholder who stops paying premiums after a certain period does not lose all the accumulated value in their policy. Instead of forfeiting the policy entirely, the policyholder can choose from several options that allow them to retain some benefit from the premiums they have already paid. These options are designed to prevent the complete loss of the policy's value if circumstances change and the policyholder can no longer afford or no longer wishes to continue paying premiums.

Common nonforfeiture options include:

• Cash Surrender Value: The policyholder receives a lump sum payment of the policy's accumulated cash value, and the policy is terminated.
• Reduced Paid-Up Insurance: The policy's cash value is used to purchase a new, smaller whole life policy that is fully paid for, meaning no further premiums are required.
• Extended Term Insurance: The policy's cash value is used to convert the whole life policy into a term life policy for the original death benefit amount, which remains in force for a specific period without further premium payments.

Here are some examples illustrating how nonforfeiture options work:

• Example 1 (Cash Surrender Value): Maria has been paying premiums on her whole life insurance policy for 15 years. Her financial situation changes unexpectedly, and she needs a significant amount of money for an emergency. She decides she can no longer afford the premiums and needs access to the policy's value.

  How it illustrates the term: Instead of simply letting the policy lapse and losing all the money she's paid, Maria exercises a nonforfeiture option to receive the policy's cash surrender value. The insurance company pays her a lump sum based on the accumulated value, and the policy is then terminated. This option prevents her from forfeiting all the value built up over 15 years.

• Example 2 (Reduced Paid-Up Insurance): David has diligently paid into his whole life insurance policy for 20 years. He is nearing retirement, and while he no longer wants the burden of monthly premium payments, he still wants to ensure his family receives some death benefit, even if it's a smaller amount.

  How it illustrates the term: David chooses the reduced paid-up insurance nonforfeiture option. The insurance company uses the policy's accumulated cash value to purchase a new, smaller whole life policy that is fully paid for. David will never have to pay another premium, and his beneficiaries will receive the reduced death benefit when he passes away. This option allows him to maintain permanent coverage without further payments, rather than forfeiting all benefits.

• Example 3 (Extended Term Insurance): Sarah has a whole life policy and has paid premiums for 10 years. She temporarily loses her job and cannot afford the premiums for the foreseeable future, but she wants to maintain her original coverage amount for as long as possible until she finds new employment.

  How it illustrates the term: Sarah selects the extended term insurance nonforfeiture option. The insurance company uses the policy's cash value to convert her whole life policy into a term life policy for the *original death benefit amount*. This new term policy will remain in force for a specific period (e.g., 5-10 years, depending on the cash value) without any further premium payments. If Sarah passes away during this extended term, her beneficiaries receive the full original death benefit. This option provides temporary continuation of the full coverage amount, preventing her from forfeiting her entire policy due to a temporary inability to pay.