Nonforfeiture Clause

What Is a Nonforfeiture Clause and How Does It Work?

After a lapse due to non-payment, a nonforfeiture (often hyphenated) clause stipulates that an insured party can obtain whole or partial benefits or a partial reimbursement of premiums. Nonforfeiture clauses can be found in standard life insurance and long-term care insurance policies. The clause could include a refund of a percentage of the total premiums paid, the policy's cash surrender value, or a reduced benefit depending on premiums paid before the policy expired.

What is a Nonforfeiture Clause and How Does It Work?

Nonforfeiture options become available when the owner of a whole-life insurance policy chooses to surrender the policy. After a certain amount of time—usually three years—the insurance company guarantees a minimum cash value for the insurance policy.

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TAKEAWAYS IMPORTANT

• A nonforfeiture clause is a provision in an insurance policy that states that if a policy lapses due to nonpayment, the covered party can obtain full or partial benefits or a partial refund of premiums.
• Nonforfeiture clauses can be found in permanent life, long-term disability, and long-term care insurance contracts.
• The owner of a standard whole-life policy chooses one of four options for accessing the policy's cash value.

The owner of a standard whole-life policy chooses one of four ways to receive the policy's cash value (see below). In variable and universal life policies, which allow for variable investing, there are no guarantees for the minimum amount of insurance offered. In addition, if a policy's sub-account performance is poor or credited interest rates are low, the amount of reduced paid-up or extended-term insurance may be lowered.

If you don't pay your premiums during the grace period on a permanent life insurance policy, you won't lose your coverage; instead, your accrued cash value will come to your rescue with the following options:

1. You have the option to cancel your coverage and get the cash surrender value in cash.
2. You can choose lesser coverage for the remainder of the policy's term and avoid paying any future premiums. (i.e., a fully paid-up insurance.)
3. You can pay future premiums with your collected cash value (also referred to as an automatic premium loan).
4. With the remaining cash surrender value, you can purchase an extended-term insurance policy. (No further premiums are necessary).

If the policyholder does not make a choice, the conditions of the policy will usually specify which option will take effect if the policy lapses or is surrendered.

Optional Payments in the Case of a Nonforfeiture Clause

The death benefit of a whole-life insurance policy is no longer available when it is surrendered. Outstanding loan amounts are satisfied with the cash value before payment to the policy owner is made.

In some cases, the nonforfeiture clause includes an annuity option. The residual cash worth can be utilized to buy an annuity that is free of fees and costs. Annuities make regular payments according to the terms of the contract.

Surrender Value in Cash

Under the nonforfeiture cash payment option, the policy owner receives the remaining cash value within six months. The savings component of whole life insurance policies payable before death has a cash surrender value. However, relative to the premiums paid, the savings element of a whole life insurance policy provides very little return in the early years.

The accumulated part of a permanent life insurance policy's cash value that is available to the policyholder upon surrender is known as cash surrender value.

The cash surrender value may be less than the actual cash value depending on the policy's age. Fees on cash surrender might be deducted by life insurance companies in the early years of a policy. The cash value of an insurance is available to the policyholder throughout his life, depending on the type of policy. It's worth noting that giving up a percentage of the cash value diminishes the death benefit.

Long-Term Care Insurance

When the policy owner selects the nonforfeiture extended term option, the cash value can be used to acquire a term insurance policy with a death benefit equal to the original whole-life policy. The insurance is based on the insured's current age. The term insurance expires after a set number of years, which is specified in the nonforfeiture table. When relinquishing a whole life insurance policy, this choice may be automatic for some carriers.

Extended-term insurance allows a policyholder to stop paying premiums but keep their policy's value. Any debts against your policy will lower the amount of cash value you have built into your policy.

The default non-forfeiture option is frequently extended-term insurance. The face value of the policy remains the same with extended term insurance, but the policy is flipped to an extended-term insurance policy. Meanwhile, the money you saved is utilized to buy a term insurance policy for the same number of years you paid premiums.

For example, if you get an insurance when you're 20 and pay until you're 55, you'll have a term policy with a term of less than 35 years. If you were 35 years old when you bought your policy and didn't pay until you were 45, you'd have a term policy that lasted less than ten years.

Policy Loans' Loan Value

Policy loans, unlike traditional loans, do not require repayment. Any money you withdraw will be deducted from the death benefit that will be distributed to your beneficiaries. You will, however, be paid interest, which will range from 5% to 9% on the borrowing, much like a traditional loan. Unpaid interest will be added to the principal balance of your loan and compounded.

Particular Points to Consider

Reduced paid-up insurance permits the policyholder to get a reduced amount of fully paid whole life insurance after commissions and charges are deducted. The face value of the new insurance will be determined by the insured's age. As a result, the death benefit is less than the one provided by the expired policy.

A policyholder can choose to convert their whole life policy's cash value into paid-up insurance. The policy is not necessarily paid up in the technical sense of the term, but it is capable of making its own premium payments in this situation.

A policyholder may have to continue premium payments in the future, depending on the type of policy and how well it has performed, or the premiums may be covered for the duration of the policy's term.