Whole life insurance provides three non forfeiture methods to ensure policyholders receive the value of their policies if they cancel them before death. The exact value of the non forfeiture benefit is determined by the length of time the policy owner paid premiums–the longer the premiums paid, the greater the non forfeiture benefit. These benefits are derived from Massachusetts laws that specify the minimum benefits that life insurers must provide to policyholders who pay a certain level of premium. These rules grew, and finally, every state in the United States enacted some form of non forfeiture provision. The Three Non forfeiture Alternatives
Today, three non forfeiture advantages are standard on all whole life plans; they are as follows:
- Cash Value Surrender
- Extended Term Insurance Reduce Paid-up Capital
Surrender For Cash Value
All whole life insurance policies build up monetary value. This accumulation is insured by the contract, while certain whole life policies can accrue non-guaranteed cash value through dividend payments. If the policy owner decides to cancel the insurance, the non forfeiture benefits operate as a repayment of the policy’s accumulated cash value.
Assume George holds a whole life insurance policy with a $1 million death payout and $50,000 in cash value. George decides he no longer wants his death benefit and does not want to pay the premium on his policy. He cancels his policy and, as a result, uses his non forfeiture benefit to surrender the policy for its cash value. When George cancels his whole life policy, the insurance company gives him a payment of $50,000.
Extended Term Care Insurance
Extended-term insurance allows whole life policyholders to convert their policies from whole life to term life insurance without having to pay premiums. This option converts the current death benefit of the whole life policy into term insurance that will last for a set amount of time. This time frame is determined by the amount of cash value accumulated in the whole life insurance.
Assume Beth has a whole life insurance policy with a $500,000 death payout and $100,000 in cash value. She wants to use the extended term insurance option on her whole life insurance policy. The insurance company computes the non forfeiture benefit and finds that Beth will get a $500,000 term life death benefit for the following 35 years.
Beth will have a $500,000 death benefit after completing the paperwork for the extended term insurance option, with no premiums to pay. Beth’s term life insurance will expire after year 35. It’s worth noting that most whole life insurance has this non forfeiture feature by default. So, if the policyholder fails to pay the premium when it is due and has not activated the automatic premium loan function, the policy will almost certainly trigger the extended term insurance benefit. This is a method for insureds to preserve their coverage if they fail to pay their premiums on time.
The Reduce paid-up option allows the whole life policy owner to keep a portion of his/her death benefit in force while continuing to benefit from other whole life policy features such as assured cash value buildup and dividends (if applicable). When you use this option, the policy becomes a paid-up life insurance policy right away. The death benefit generated by the reduction paid-up option is determined by the cash value of the whole life policy at the time the option is exercised.
Assume Vivian holds a whole life policy with a $1 million death benefit and a cash value of $250,000. She desires to take advantage of her reduced paid-up non forfeiture benefit. Vivian’s cash value will remain at $250,000 after activating this option, but her death benefit will increase to $600,000. She will no longer pay premiums on her insurance, but she will continue to receive dividends and her cash value will continue to generate guaranteed interest. She will also be able to withdraw funds and take policy loans from the policy.
What Does The Policy Owner Get With Non forfeiture Options?
The policy owner receives different benefits from each of the three non forfeiture alternatives. In the event of a monetary surrender. The guarantee is the cash value of the whole life policy at the time of purchase. The extended term insurance option assures the policy owner the current death benefit of the whole life policy for a set number of years while requiring no premium payment. The reduced paid-up option ensures that a lower whole life death benefit remains in effect for the duration of the insured’s life with no premium payments required.
Which of the non-forfeiture options continues to accrue cash value?
The option to lower paid-up capital will continue to accrue cash value. It will accomplish this by accumulating guaranteed interest and (if applicable) paying dividends if the dividend option is set to paid-up additions. The other two alternatives, extended-term and cash surrender, will not accumulate financial value for the insurance owner. Term insurance does not have a cash value. Furthermore, the surrender for cash value terminates any life insurance coverage provided by the whole life policy. The money released from the surrender for cash value option is completely up to the policy owner.
Which non forfeiture feature provides the longest period of coverage?
Because the answer relies on the precise purpose, we must divide this question into two parts. The extended term insurance option will provide guaranteed coverage of the initial death benefit for the longest amount of time. When the policy owner activates this benefit, no changes are made to the death benefit.
The option with the lowest paid-up value will provide some degree of the death benefit for the longest length of time. The resulting death benefit will be less than the present death benefit, but it is guaranteed to remain in effect for the insured’s whole lifetime. There is a potential that the death benefit will grow to a greater amount than the amount of death benefit remaining after activating this function. This is only true if the whole life policy pays dividends, the dividend choice is set to paid-up additions and the dividends paid are large enough to eventually produce a larger death benefit. This signifies that the outcome is not certain. One of the options requires a monetary investment to be exercised.
Only if the entire life policy has cash value is it possible to activate a non forfeiture benefit. For the first several years, certain whole life plans will have no cash value. In this circumstance, the policyholder is unable to make use of any of these benefits. He/she will receive no benefit if he/she cancels his/her entire life policy at this time. The amount of cash value in the whole life policy determines how much non forfeiture benefit value the policy owner can receive upon activating the provision.
More cash worth, for example, will often result in a greater number of years of long-term insurance coverage. When utilising the reduced paid-up option, more cash value results in a smaller reduction in death benefit. And, of course, the higher the cash value, the more money the insurance owner receives if the policy is surrendered for cash.