When the insured Select extended term Nonforfeiture option the cash value will be used to purchase term insurance with what face amount?

The three nonforfeiture options can easily be remembered with the acronym C-E-R and they are as follows:

1 – Cash Surrender – If the owner of the policy selects this nonforfeiture option, the policy will be canceled and the insurer will mail a check to the policy owner.  If the policy owner elects cash surrender there will be no further life insurance coverage, and they may have to pay ordinary income tax if they receive more money than they paid into the policy in premiums.

2 – Extended Term – If this option is selected by the policy owner, the cash value from their original policy will be used to purchase a term policy that will have the same face amount (amount of insurance protection) as the original policy.  If this option is selected, there is no additional premium due from the owner of the policy and they will have the same amount of coverage as they had in the original policy, but only for a limited time.  Remember, term insurance is temporary.  Term life insurance is NOT permanent.

3 – Reduced Paid-up – If this nonforfeiture option is selected by the policy owner, the cash value from their original policy is used as a single premium to purchase them a paid-up whole life policy.  There are two things you need to know about this selection for your licensing exam.  First, the amount of coverage under this new policy is reduced.  Second, this new whole life policy will provide permanent coverage.

What is a nonforfeiture values policy?

Any policy which accumulates cash value is a nonforfeiture values policy.  In fact, the cash values in a policy are sometimes referred to as nonforfeiture values.  You need to know which policies will accumulate a cash value.  Term insurance has NO cash value.  In turn, term insurance has no nonforfeiture values.

However, policies such as whole life and endowments do accumulate cash value, which means they both have nonforfeiture values.  Usually, the cash value will begin to accumulate in a policy after the first three years, however, single premium policies will have an immediate cash value.

Which nonforfeiture options continue to build up cash value?

If a policy owner elects the reduced paid-up nonforfeiture option, the cash value from their original policy will be used to purchase a single premium whole life policy.  Whole life insurance is permanent and accumulates cash value.  Remember, term insurance has no cash value, so if the owner selects the extended term option, there will be no further cash value accumulation.  Of course, if they select cash surrender, there is no further life insurance coverage at all.

Which nonforfeiture option provides the highest amount of insurance protection?

Well, think of it this way.  Say you have $50,000 that you would like to use to buy a life insurance policy.  Between a whole life and a term policy, which policy would be able to provide you the biggest bang for your buck?  Or, in other words, which policy would provide the highest amount of life insurance protection?  Term!!  Term insurance has no cash value and is the cheapest form of life insurance.

Which nonforfeiture option provides the highest amount of protection?  Extended Term!  Why?  It’s the cheapest form of life insurance and accumulates no cash value!

Why is a nonforfeiture option used?

In most states, those life insurance policies that accumulate cash value are required to have nonforfeiture values.  What if the owner of the policy forgets to pay their premium and the policy lapses?  Can the insurance company just keep the cash value?  No!  They are generally required by law to provide the owner of the policy a choice of what they would like to do with their cash value.  This is where the nonforfeiture values come in!

What else can help me prepare to pass my insurance licensing exam on my first attempt?

If you need any help preparing to pass an insurance licensing exam, we have some excellent courses which are primarily video-based.  Check out our available courses now:

Insurance Licensing Exam Prep Video Training Courses

Other tips to help you pass your insurance licensing exam on your first attempt:

Insurance Exam Test Taking Tips

Also, check out our definition and question of the day videos on our YouTube channel:

PassMasters Insurance Exam Prep YouTube Channel

b)Equal to the original policy for as long as the cash values will purchase. With this option, the cash value is used as a single premium to purchase the same face amount as the original policy for as long a period of time as the cash will buy at the insured's current age.

We can credit our favorite kite-flying forefather, Benjamin Franklin, for playing a major role in founding the life insurance industry in the United States in the 1700s1 but it was not until the mid-19th century that the regulatory framework for the industry was created.2 Insurance regulations were developed to protect consumers in three main areas: the financial solvency of insurance companies, the products they sell, and market conduct and prevention of unfair trade practices.2

Almost all regulations that life insurance companies must follow are state laws rather than federal laws. Each state has a state insurance department, which means that a life insurance company that operates in each state must adhere to the governing laws of every state they operate in.3

The National Association of Insurance Commissioners (NAIC) is the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia, and five U.S. territories. NAIC acts as a forum for the creation of model laws and regulations, but generally, each state decides whether to pass these model laws and regulations. States are allowed to make changes during the enactment process but the model laws and regulations are widely adopted.2

wherein you agree to pay the insurance company the policy premiums, and the insurance company agrees that, upon your death, it will pay the death benefit you have selected to your designated beneficiary if the benefit is payable according to the provisions of the policy. Like any other legal contract, life insurance policies have rules and provisions depending on the type of policy you buy.

Sometimes, people stop paying premiums on their life insurance. For some policies, the policy terminates after a grace period but if the policy has cash value, state law prevents insurance companies from terminating the policy and keeping the cash value.4

A non-forfeiture option

(or clause) is a provision included in certain life insurance policies stipulating that the policyholder will not forfeit the value of the policy if the policy lapses after a defined period due to missed premium payments. The nonforfeiture clause may also become available when the holder of some life insurance policies surrenders (actively cancels) the policy.5 Carefully weigh the consequences of canceling your original policy, which also cancels the death benefit of the policy.

Whole life insurance policies generally have three standard payout options in the non-forfeiture clause.

• If the policyholder chooses the cash surrender option, the insurance company pays the cash value to the policy owner as a lump sum. At that point, the policy is canceled and can’t be reinstated; the insurer’s responsibility under the contract ends. Most states allow insurance companies up to six months to pay the cash surrender value.6
• This option allows the policy owner to use the cash value from their policy to place the policy on extended term insurance. This option also helps the policy owner to quit paying premiums for the original policy.5 The length of time the new policy will be in force will depend on the cash values available from the policy.5 A policy converted to term insurance may be reinstated under the reinstatement provision of the contract provided the term has not expired.4
• Choosing this option means the policy’s cash value is used to buy a paid-up policy of the same type as the policy that lapsed. The policyholder pays no further premiums. The new policy will have a reduced death benefit but will retain a cash value that will grow throughout the life of the policy at a reduced rate.5

If the policyholder doesn’t select an option, the insurance company will have a default option contained in the policy’s language. The Extended Term Option is often the insurance company’s default option.

There are other non-forfeiture options, but not all insurance companies make these options available.

• Some insurance companies will also allow the policy owner to convert the policy to an annuity, which will pay the policy owner an amount for the rest of his/her life. That amount is based on the cash value of the lapsed or surrendered policy and the policy owner’s age.4
• An automatic premium loan is a provision in a life insurance policy with a cash value that allows the insurer to automatically deduct the premium amount overdue from the policy value. The insurance company makes a loan against the policy’s cash value for paying the overdue premiums provided the cash value is more than or equal to the premium amount due.7

If you find yourself in a situation where you cannot or no longer wish to pay the premiums on a life insurance policy with a cash value, using one of the non-forfeiture options may be a good choice for you. Keep in mind that non-forfeiture options may adversely impact some coverage; for example, reducing the face amount or canceling the policy completely. Your insurance agent can help you weigh the pros and cons so you can decide what is best for you.

Categories: insurance, life insurance

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