What is a Nonforfeiture option in life insurance?

Legally, nonforfeiture options protect policyholders from losing life insurance coverage for missed payments. If you miss your life insurance payments, you will surrender your policy back to the company. However, you are still entitled to full or partial benefits or a refund of premiums.

The nonforfeiture option you choose in your life insurance policy will determine whether you receive benefits or a refund after you surrender your policy.

What are the three nonforfeiture options? Most life insurance companies will allow policyholders to surrender a policy for its cash value or exchange it for a paid-up or extended term life insurance policy.

We discuss your nonforfeiture life insurance options in-depth below:

Cash Surrender Nonforfeiture Option

With this option, policyholders receive the full cash surrender value of their whole life insurance policy. This value is the savings the whole life policy accumulated while it was in place.

Since this value is receivable before death, it is also available as a nonforfeiture option. However, the surrender value is often significantly less than your death benefit. For example, a $1 million death benefit may only receive $50,000 cash at time of surrender.

If you have universal or variable life insurance, your cash surrender value may be worth more based on investments. Read our guide to whole vs. universal life insurance to learn more.

Reduced Paid-Up Nonforfeiture Option

If you want to keep your whole life insurance policy, choose a reduced paid-up nonforfeiture option. In this case, you will opt for reduced death benefits with no additional monthly payments.

This paid-up feature means you maintain life insurance coverage, and your survivors will still receive a death benefit after you pass. However, you may want to consider your budget and your family’s needs if you plan to reduce your life insurance coverage.

Extended Term Nonforfeiture Option

Much like the paid-up option, this route gives policyholders the chance to use the cash surrender value and buy a term life insurance policy. The advantage here is that the term life death benefit will be the same amount as your original whole life death benefit.

However, term life insurance only lasts for a set period. Your term is based on how long you paid whole life insurance premiums.

For example, if you bought whole life insurance when you were 20 and forfeited the policy at 60, you would receive a 40-year extended term life insurance policy.

Are there other nonforfeiture options available?

Yes, policyholders can also choose to convert the policy to an annuity. The annuity amount is determined by the cash value of the policy and the policyholder’s age.

Policyholders may also choose to use the cash value as a premium loan for the missed payments. Coverage and death benefits will remain intact as long as the cash value is equal to or exceeds the overdue amount.

Not every life insurance company will offer an annuity-based or premium loan nonforfeiture option. If these options are important to you, you will need to compare quotes from multiple life insurance companies in your area to find the insurer with the right policy.

What kind of life insurance policy has nonforfeiture options?

Whole life insurance policies are most likely to have nonforfeiture options because they come with an investment account. This investment amount becomes the surrender value required by the nonforfeiture disclosure.

Long-term care and long-term disability policies may also have nonforfeiture options. In some states,like New York, long-term care and disability insurance policies must have nonforfeiture clauses. This entitles those who need it to continue receiving care even after missing payments.

However, coverage levels and term lengths can be reduced based on how much remains in the policy's cash value.

How much do nonforfeiture options cost?

Nonforfeiture options won’t necessarily raise your life insurance rates. However, whole life insurance costs more than term life, and term life policies are not eligible for nonforfeiture options.

On average, whole life insurance rates average between $500-$900 per month, depending on your age and level of coverage.

Compare that to the $28-$98 monthly payments for a 20-year term life policy. So, if you want a nonforfeiture option, be prepared to pay significantly more for your policy. Read our term vs. whole life insurance guide to learn more and compare rates closely.

Which is the best nonforfeiture option for life insurance?

If you’re looking for the nonforfeiture option with the highest death benefits and most insurance protection, choose the extended term nonforfeiture option. This option allows you to keep your original coverage levels and benefits, just for a shorter period.

Suppose you’re switching life insurance companies. In that case, the best nonforfeiture option would be the cash surrender value. You will lose the rates and coverage you have with your current provider, but you can put the surrender value toward a more affordable life insurance policy with another company.

Your life insurance rates will be more expensive the older you are, so shop around before you decide to switch companies. Enter your ZIP code below to start comparing life insurance quotes for free so you can find the best policy with the right nonforfeiture options for you.

References

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!

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