Life Insurance Information Components Cash value

Nonforfeiture

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What is nonforfeiture?

Nonforfeiture is an provision which prevents the loss of cash value in permanent life insurance policies that lapse.  (Your policy does not need to lapse for you to execute a nonforfeiture option; you may terminate the policy at any time and implement the provision.)

When you create a permanent life insurance policy, you determine how you would like your cash value to be handled in the event of lapse.  However, you may change your decision at any time thereafter.

What is policy lapse?

Policy lapse occurs when the policyholder doesn’t keep up the necessary premium payments.  Following a failure to pay premiums, there is a grace period, during which the policyholder is permitted to reinstate his policy by paying the due premiums (plus interest or penalties).  At the end of the grace period, if the policyholder has not reinstated his or her life insurance policy, it terminates for good, and a nonforfeiture option is executed.

What are my nonforfeiture options?

Your life insurance company will provide at least the following three options for the disposal (or remittance) of your cash value:

1. Automatic surrender—You receive the policy’s cash value, less any surrender charges.
2. Extended term life insurance—The cash value is used to purchase a term life insurance policy of the same face amount as your permanent policy (less any outstanding loans).  The length of the term depends on the amount of cash value available.  In short, your death benefit has not changed, but your term of coverage has decreased.
3. Reduced, paid-up life insurance—The cash value is used to purchase a paid-up, permanent life insurance policy (one that requires no future premiums).  The face value of the new policy is the amount of single-premium life insurance the available cash value can afford.  In short, your term of coverage remains the same, but your death benefit is significantly decreased.

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