If you have a permanent life insurance policy, you have several decisions to make when considering surrendering your policy for the cash value. One route you can take is choosing a life insurance non-forfeiture option. These are provisions in a life insurance policy that allow you to keep some of the benefits of your policy even if you stop paying your premiums or terminate the policy. This article will explore non-forfeiture options so you can decide if they’re right for you.
How do life insurance non-forfeiture options work?
The purpose of life insurance non-forfeiture options is to provide policyholders with alternatives to surrendering their policies while ensuring that they receive some value from the premiums they have already paid. These options can provide financial flexibility and security in the event that the policyholder's circumstances change and they can no longer afford to pay premiums.
There are three primary types of non-forfeiture options available in most life insurance policies:
Cash Surrender Value: This option allows the policyholder to receive the cash value of the policy when surrendering it. The cash value is the amount of money the policyholder is entitled to after deductions for any outstanding loans and surrender charges.
Reduced Paid-Up Insurance: With this option, the policyholder can stop paying premiums and convert the policy into a paid-up policy for a reduced face amount. The reduced face amount is determined based on the cash value of the original policy.
Extended Term Insurance: This option enables the policyholder to use the cash value to purchase a term insurance policy for the same face amount as the original policy. The length of the term is determined by the cash value and the insured's attained age.
What types of policies include non-forfeiture options?
Permanent life insurance policies are the only types of policies that come with a cash value component and, therefore, are the only types of coverage that offer non-forfeiture options. These types of policies include whole life insurance and universal life insurance.
Whole Life Insurance: As a type of permanent life insurance, whole life insurance offers coverage for your entire lifetime, as well as a cash value component that grows over time. Whole life insurance differs from universal life insurance by having a set premium, meaning the premium you pay when you activate your policy is the same amount you’ll pay each month for the life of the policy.
Universal Life Insurance: Universal life insurance policies are typically more flexible than other types of permanent life insurance. While premiums tend to be higher, they offer a flexible premium, meaning you get to determine what premium you pay between the minimum and maximum set amount and can adjust your death benefit based on cash value accumulation.
If your permanent life insurance policy does have a non-forfeiture clause, the amount you receive from taking the option will depend on the type of permanent policy you have as well as the type of non-forfeiture options available to you. Navigating these decisions can be confusing, but talking to an experienced licensed life insurance agent can help you make sense of your non-forfeiture options.
SelectQuote Can Help You Understand Your Life Insurance Options
Understanding the ins and outs of life insurance features like non-forfeiture options can be confusing to do on your own, but SelectQuote is here to help. Our licensed insurance agents have nearly 40 years of experience helping people like you make choices about their coverage. We’ll walk you through all the options available to you so you can feel confident in the decisions you make.
