What are Nonforfeiture options in insurance?

When a permanent life insurance policy lapses due to non-payment, or when the policyholder chooses to surrender the coverage, the nonforfeiture clause helps protect the accumulated cash value. Nonforfeiture clauses stipulate how a policyholder can receive their policy’s cash value, allowing them to receive a lump-sum payment or apply the funds to continuing coverage.

• A nonforfeiture clause helps protect a life insurance policyholder’s accumulated cash value.
• A nonforfeiture clause is triggered when a policyholder stops paying premiums or surrenders their permanent life insurance policy.
• A nonforfeiture clause may offer several payout options.
• Some payout options allow the policyholder to continue life insurance coverage.

A nonforfeiture clause determines how an insurance policyholder can receive their policy’s accumulated cash value in the event of a lapse due to non-payment, or when the policyholder chooses to surrender the coverage. The terms and conditions of a life insurance policy require you to make premium payments.

In addition to a death benefit, permanent life insurance policies also build a cash value over time. A nonforfeiture clause, which stipulates that a policyholder will not forfeit their accumulated cash value if they stop paying premiums, is part of many permanent life insurance policies.

Let’s say you have a $120,000 whole life policy that has accumulated a cash value of $30,000. Six months ago, you lost your job and now can’t afford the premium payments. If your policy lapses due to non-payment, you are still entitled to the accumulated cash value if your policy contains a nonforfeiture clause.

After a policyholder has paid premium payments for a sufficient period, the policy’s nonforfeiture clause may apply if the policy lapses due to non-payment. The nonforfeiture clause may also kick in if the policyholder surrenders the policy. The amount of money an insurer will return to the policyholder depends on the policy’s surrender value. This is the amount the policyholder can borrow or withdraw from the accumulated cash value.

Surrender value and cash value are two different things. The cash value is the amount a policy is worth as it grows over time. If you take an early withdrawal from the policy, you will most likely have to pay a steep fee, which will affect the remaining value—the surrender value. 

When a policyholder chooses to surrender their life insurance policy or if it lapses due to non-payment, they may have several payout options.

Automatic premium loan: When a policy lapses due to non-payment, some insurance companies allow the policyholder to borrow the amount of lapsed payments from their policy’s accumulated cash value. This option is only available when the lapsed premiums amount is less than or equal to a policy’s cash value.

Cash surrender value: With this option, the insurance company cancels the policy and pays its cash surrender value in one lump-sum payment. Most state insurance codes enable insurers to take up to six months to make the payment. And once the carrier cancels the policy, it cannot reinstate the coverage.

Extended term: The extended-term option enables the policyholder to use the cash value from the original policy to purchase term life insurance coverage. The length of the term will depend on the amount of cash value accumulated in the original permanent life policy. Nonforfeiture clauses stipulate a default payout, which is often the extended term option. 

Reduced paid-up: This option allows the policyholder to use the cash surrender value to purchase another permanent life policy of the same type with a single lump-sum payment. The new policy will have a reduced face value but will accumulate a cash value without paying further premiums.

Single-premium annuity: Some carriers enable a policyholder to use the cash surrender value to purchase an annuity. The amount of the lump sum payment will depend on the amount of the original policy’s accumulated cash value and will pay the policyholder for the remainder of their life.

Pros

• Retains accumulated cash value

• Option to continue life insurance coverage

Cons

• Reduced death benefit

• Loss of coverage

Retains accumulated cash value: A nonforfeiture clause safeguards a policy’s investment by allowing the policyholder to cash out the accumulated cash value.

Option to continue life insurance coverage: The cash value of a policy protected by a nonforfeiture clause may also be used to purchase another policy or annuity.

Reduced death benefit: When the policyholder chooses the extended term or reduced paid-up options, they can retain life insurance coverage, but with a reduced death benefit.

Loss of coverage: Choosing the cash surrender value option enables the policyholder to keep their accumulated cash value, but it also cancels the life insurance coverage. 

A nonforfeiture clause ensures that a permanent life insurance policy owner will not lose their accumulated cash value. While it’s an important financial safeguard, it requires the policyholder to make wise choices when selecting a payout option.

Sometimes, a policyholder may no longer need the life insurance coverage. In such cases, receiving a lump-sum payout can prove beneficial. But when a policy lapses due to non-payment and the policyholder still needs life insurance coverage, nonforfeiture options, which often reduce coverage, can leave them with insufficient protection.

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What You Should Know

• Nonforfeiture options are available with whole life insurance, long-term disability coverage, and long-term care insurance
• Nonforfeiture options protect policyholders from losing life insurance coverage for missed payments
• Policyholders can choose from three common types of nonforfeiture options

Nonforfeiture options in life insurance refer to the different ways policyholders can maintain coverage after lapsing on premium payments. These options are available with whole life insurance, long-term disability coverage, and long-term care insurance.

The three types of nonforfeiture options available are:

• Cash surrender
• Reduced paid-up insurance
• Extended term insurance

Keep reading our guide to learn more about the nonforfeiture meaning and what these options mean to your life insurance policy. We’ll also compare quotes from the best life insurance companies so you can better decide if whole life insurance with nonforfeiture options is right for you.

Before you buy life insurance, enter your ZIP code above to compare free life insurance quotes from local companies offering nonforfeiture options.

What is a nonforfeiture option in life insurance?

Legally, nonforfeiture options protect policyholders from losing life insurance coverage for missed payments. If you miss your life insurance payments, you will surrender your policy back to the company. However, you are still entitled to full or partial benefits or a refund of premiums.

The nonforfeiture option you choose in your life insurance policy will determine whether you receive benefits or a refund after you surrender your policy.

What are the three nonforfeiture options? Most life insurance companies will allow policyholders to surrender a policy for its cash value or exchange it for a paid-up or extended term life insurance policy.

We discuss your nonforfeiture life insurance options in-depth below:

Cash Surrender Nonforfeiture Option

With this option, policyholders receive the full cash surrender value of their whole life insurance policy. This value is the savings the whole life policy accumulated while it was in place.

Since this value is receivable before death, it is also available as a nonforfeiture option. However, the surrender value is often significantly less than your death benefit. For example, a $1 million death benefit may only receive $50,000 cash at time of surrender.

If you have universal or variable life insurance, your cash surrender value may be worth more based on investments. Read our guide to whole vs. universal life insurance to learn more.

Reduced Paid-Up Nonforfeiture Option

If you want to keep your whole life insurance policy, choose a reduced paid-up nonforfeiture option. In this case, you will opt for reduced death benefits with no additional monthly payments.

This paid-up feature means you maintain life insurance coverage, and your survivors will still receive a death benefit after you pass. However, you may want to consider your budget and your family’s needs if you plan to reduce your life insurance coverage.

Extended Term Nonforfeiture Option

Much like the paid-up option, this route gives policyholders the chance to use the cash surrender value and buy a term life insurance policy. The advantage here is that the term life death benefit will be the same amount as your original whole life death benefit.

However, term life insurance only lasts for a set period. Your term is based on how long you paid whole life insurance premiums.

For example, if you bought whole life insurance when you were 20 and forfeited the policy at 60, you would receive a 40-year extended term life insurance policy.

Are there other nonforfeiture options available?

Yes, policyholders can also choose to convert the policy to an annuity. The annuity amount is determined by the cash value of the policy and the policyholder’s age.

Policyholders may also choose to use the cash value as a premium loan for the missed payments. Coverage and death benefits will remain intact as long as the cash value is equal to or exceeds the overdue amount.

Not every life insurance company will offer an annuity-based or premium loan nonforfeiture option. If these options are important to you, you will need to compare quotes from multiple life insurance companies in your area to find the insurer with the right policy.

What kind of life insurance policy has nonforfeiture options?

Whole life insurance policies are most likely to have nonforfeiture options because they come with an investment account. This investment amount becomes the surrender value required by the nonforfeiture disclosure.

Long-term care and long-term disability policies may also have nonforfeiture options. In some states,like New York, long-term care and disability insurance policies must have nonforfeiture clauses. This entitles those who need it to continue receiving care even after missing payments.

However, coverage levels and term lengths can be reduced based on how much remains in the policy's cash value.

How much do nonforfeiture options cost?

Nonforfeiture options won’t necessarily raise your life insurance rates. However, whole life insurance costs more than term life, and term life policies are not eligible for nonforfeiture options.

On average, whole life insurance rates average between $500-$900 per month, depending on your age and level of coverage.

Compare that to the $28-$98 monthly payments for a 20-year term life policy. So, if you want a nonforfeiture option, be prepared to pay significantly more for your policy. Read our term vs. whole life insurance guide to learn more and compare rates closely.

Which is the best nonforfeiture option for life insurance?

If you’re looking for the nonforfeiture option with the highest death benefits and most insurance protection, choose the extended term nonforfeiture option. This option allows you to keep your original coverage levels and benefits, just for a shorter period.

Suppose you’re switching life insurance companies. In that case, the best nonforfeiture option would be the cash surrender value. You will lose the rates and coverage you have with your current provider, but you can put the surrender value toward a more affordable life insurance policy with another company.

Your life insurance rates will be more expensive the older you are, so shop around before you decide to switch companies. Enter your ZIP code below to start comparing life insurance quotes for free so you can find the best policy with the right nonforfeiture options for you.

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