Key Takeaway
There are three main types of nonforfeiture options: cash surrender value, extended-term, and paid-up. Each of these options may impact your final death benefit, because they are usually tied to your cash value account on your universal life insurance policy. In permanent life insurance products, like universal life insurance, you may already have a nonforfeiture clause included in your policy.
Nonforfeiture Clauses: What Are They?
How The Clauses Work
When a policyowner surrenders their policy, they have a few nonforfeiture options: cash surrender value, extended-term, and paid-up. The insurance company typically guarantees a minimum cash value for the insurance policy after a specific period.
Usually, there aren’t any guarantees for the minimum amount of life insurance available in universal policies. This allows for variable investing, which can mean that the amount of reduced paid-up or extended-term insurance could decrease if the policyholder’s subaccount performance declines or the credited interest rates are low.
The Nonforfeiture Payout Options
In most permanent life insurance policies, policyholders won’t lose their life insurance if they are unable to pay their premiums within the specified grace period. Instead, they can utilize their accumulated cash value with the following nonforfeiture options below:
Cash Surrender Value
In a cash surrender value option, the insurer generally pays the remaining cash value within six months of the policyholder terminating the policy. The cash surrender value will usually apply to the savings element of whole life insurance policies payable before death.
So, what is a cash surrender value? A cash surrender value is the accumulated portion of a permanent life insurance policy’s cash value that is available to the policyholder at the time of the surrender of the policy.
This means that, depending on the age of the policy, the cash surrender value could be less than the actual cash value. If you terminate your policy in the early years after its effective, your insurance company may deduct fees upon cash surrender.
Extended-Term Option
An extended-term option allows policyholders to use the cash value account to purchase an additional term insurance product with a death benefit that is an equal amount to the original universal life policy. This new term policy ends the same way a traditional term policy would, after a fixed number of years that are detailed in the policy’s nonforfeiture table.
In this type of option, policyholders can stop paying the premiums but cannot forfeit the equity of their policy. The cash value amount you have built into your policy will likely be reduced by the amount of loans‒if applicable‒against your life insurance.
Paid-Up Insurance
Paid-up insurance nonforfeiture options allow policyholders to use their cash surrender value to buy a paid-up version of the same type of life insurance product. This usually results in the policyholder no longer having to make premium payments.
However, this option can have important factors to consider. With paid-up nonforfeiture options, the policyholder may reduce the death benefit by surrendering a portion of the cash value. The policy could still retain that cash value component, but its growth could be reduced. The sooner you get started on your life insurance journey, the more your cash value accounts could grow, increasing your death benefit payout.
