Policy Nonforfeiture Options Quiz

Study Notes

Nonforfeiture Options Overview

Nonforfeiture options protect the cash value of life insurance policies when there's a lapse or surrender.
Three standard options: cash surrender, extended term insurance, and reduced paid-up insurance.

Cash Surrender Option

Policyowner receives cash value as a lump sum upon surrender.
Policy is then canceled; insurer no longer holds responsibility.
Surrendered policies cannot be reinstated.
Insurers may delay cash surrender payment for up to six months, but few do.

Extended Term Insurance Option

Cash value of lapsed policy used to purchase a term life insurance policy.
New term coverage equals the face amount of the lapsed policy, lasting based on cash value.
Example: A $50,000 whole life policy with a cash value of $12,000 can buy $50,000 of term insurance for approximately 14 years.
No further premiums required, but this option is ineligible for dividends even if the original policy was participating.

Automatic Option

Extended term insurance is typically applied automatically if no nonforfeiture option is elected upon lapse.

Reduced Paid-Up Insurance Option

Cash value converted to a paid-up policy using a single premium.
Example: $12,000 cash value can buy $28,000 of paid-up whole life insurance.
The new policy has no further premium payments and retains a cash value, albeit at a lower growth rate.
Eligible for dividends if the original policy was participating, regardless of whether it was standard or substandard.

Nonforfeiture Options and Universal Life Insurance

Universal life (UL) policies differ as they do not include the three standard nonforfeiture options.
UL policy remains active as long as cash value supports monthly deductions.
Once cash value is insufficient to cover costs, the policy lapses, often without a remaining cash value.
However, UL policyowners can still surrender the policy for its cash value, full or partial.

Example Cases

Dan opted for the reduced paid-up option, using his whole life policy's $20,000 cash value to buy $35,000 in coverage.
Jerry chose to surrender his permanent life insurance policy for its cash value.

Description

This quiz covers the essential nonforfeiture options in life insurance policies, including the cash surrender option, extended term insurance, and reduced paid-up insurance. Test your knowledge on how these options prevent loss of cash value in various scenarios such as policy surrender or lapse.