If you keep pace with everything transpiring in the insurance world, there is a good chance you’ve heard about nonforfeiture clause at some point in life. This is merely an insurance policy clause stipulating than the insured can receive full or partial benefits or partial refund of premiums after a lapse due to nonpayment. The clause is mainly common in standard life insurance and long-term care insurance.
When you decide to surrender your whole life insurance policy, nonforfeiture options become available. Your insurer guarantees a minimum cash value for the insurance policy after a specific period. This is mostly three years from when placed in force. For traditional whole-life policies, there are four ways in which the policyholder can access the policy’s cash value.
You can decide to terminate your policy and get the cash surrender value in hard cash or simply go for reduced coverage for the remaining term of the policy with no future premiums. If you don’t deem this appealing, you can use your accumulated cash value to pay the future premiums. Alternatively, you can buy an extended-term insurance policy with the remaining cash surrender value.
Once you surrender a whole-life insurance policy, the death benefit ceases to exist. But always keep in mind the outstanding loan amounts are satisfied with the cash value before issuing payment to the policy owner. Furthermore, there are select companies that offer an annuity option in the nonforfeiture clause. The cash value that remains may be used to purchase an annuity free of commission or expenses.
You may already be wondering why the nonforfeiture clause even exists in the first place. Well, the clauses offer consumer protection in the event a policyholder stops paying their premium. At times, a policy expires after the grace period. But what is cash has accumulated in the policy? In this case, state law forbids companies from keeping the cash and canceling the policy.
Now that you have insights into how nonforfeiture options, it pays off to do a bit of research to better understand how they work before leveraging them.