Group Life Insurance: Nonforfeiture Benefits Explained

Group life insurance is a type of insurance coverage offered by an employer or large-scale entity, such as an association or labor organization, to its workers or members. It is typically inexpensive and sometimes even free for employees, as the cost is often covered by the employer. While group life insurance policies do not require a medical exam for coverage, they generally provide basic coverage with relatively low death benefits.

Now, a nonforfeiture clause in a life insurance policy allows the policyholder to receive full or partial benefits or a partial refund of premiums after a lapse in their policy. This clause is designed to protect the insured in the event that they can no longer afford to pay premiums.

So, does group life insurance have a nonforfeiture benefit? The answer is, it depends. While nonforfeiture clauses are commonly found in permanent life insurance policies, long-term disability policies, and long-term care insurance policies, it is not guaranteed that they will be included in group life insurance plans. The presence of a nonforfeiture clause and the specific benefits it provides will vary depending on the insurance provider, the group policy in question, and the regulations in the applicable state.

Group life insurance: What is it?

Group life insurance is a type of insurance coverage offered by an employer or large-scale entity, such as an association or labour organisation, to its workers or members. It is typically inexpensive and may even be free for certain employees, making it a common employee benefit. Group life insurance is usually offered as part of a larger benefits package and provides financial protection for the insured's beneficiaries in the event of their death while they are still part of the organisation.

Group life insurance is a single contract that covers a group of people, allowing companies to secure lower costs for each individual employee compared to purchasing separate policies. Those receiving group coverage may not have to pay anything out of pocket, as premiums can be deducted from their paychecks. Insured parties must list one or more beneficiaries before the policy takes effect, and these can be changed at any time during the coverage period.

The typical group policy is term life insurance, which is renewable annually and provides coverage for a fixed period. Whole life insurance, on the other hand, provides permanent coverage and has higher premiums and death benefits. With group life insurance, the employer or organisation retains the master contract, while employees who elect coverage receive a certificate of coverage.

Requirements and considerations

Group life insurance policies often come with certain conditions. For example, organisations may require members to participate for a minimum amount of time before granting coverage, which is generally basic. Coverage is usually only valid for as long as the member is part of the group, and once they leave, coverage ends.

While group life insurance offers value for money and easy qualification, it typically provides only basic coverage, which may not fulfil the needs of policyholders. Additionally, the employer controls the policy, and coverage may cease if the organisation terminates the insurance or the employee switches jobs. However, employees do have the option to continue coverage at the individual level, although this comes with higher premiums.

Nonforfeiture clauses: What are they?

A nonforfeiture clause is a provision included in standard life insurance and long-term care insurance policies. It is designed to protect the insured party in the event that they can no longer pay their premiums or if they surrender their policy. This clause stipulates that the insured party can receive full or partial benefits or a partial refund of premiums after a lapse in coverage due to nonpayment.

Nonforfeiture clauses are typically found in permanent life insurance, long-term disability, and long-term care insurance policies. They are not usually included in term life insurance policies, as these are intended to provide coverage for a specific period only and do not build cash value.

When a policyholder decides to surrender their policy, they have several nonforfeiture options available to them, including:

• Cash Surrender Value: The policyholder can terminate the policy and receive the accumulated cash value, minus any outstanding loan amounts, within six months. The cash surrender value may be less than the actual cash value, depending on the age of the policy.
• Extended-Term Insurance: The policyholder can use the accumulated cash value to purchase a term insurance policy with the same death benefit as the original policy, but without the need for further premium payments. This option allows the policyholder to maintain coverage for a specified period.
• Loan Value: The policyholder can take out a loan against the policy's cash value, which does not need to be paid back. However, any money withdrawn will be deducted from the death benefit paid to beneficiaries, and interest will be charged on the loan amount.
• Paid-Up Insurance: The policyholder can receive a reduced amount of whole life insurance, excluding commissions and expenses. The death benefit will be lower than the original policy, and no future premium payments will be required.

If the policyholder does not make a selection, the insurance company will typically choose one of these options on their behalf, as outlined in the original policy.

Nonforfeiture clauses are important as they ensure that policyholders do not lose the entire value of their policy when they decide to discontinue it. They provide flexibility and allow policyholders to retain some benefits or cash value, even if they can no longer afford their premiums.

Permanent life insurance: What is it?

Permanent life insurance is a type of insurance policy that lasts indefinitely, or until the policyholder passes, as long as the premiums are paid. It is designed to provide long-term, often lifelong, coverage. Permanent life insurance policies usually have the basic components of other types of life insurance policies, like the death benefit and some type of savings element.

There are a few different types of permanent life insurance policies:

• Whole Life Insurance: This is a common type of permanent life insurance that lasts the policyholder's entire life, builds cash value in a secure account, and has regularly scheduled premiums to keep the policy active. With whole life coverage, your premiums are locked in at the time of purchase and are guaranteed not to go up.
• Universal Life Insurance: This type of permanent life insurance policy allows for adjustable premium payments over time. You may be able to scale your rates down or skip a payment to pay for other large expenses, but this can negatively impact the cash value of your plan and your premiums could eventually increase over time.
• Variable Universal Life Insurance: This type of policy has flexible premiums and a savings component, but more factors influence how the savings can grow. The savings portion, or cash value, grows based on the investment methods that you choose.
• Indexed Universal Life Insurance: This type of policy has the same basic parts as a permanent life insurance policy, but the cash value grows based on a chosen stock market index.

The main benefit of permanent life insurance is that it lasts through the policyholder's entire life cycle. It also offers a cash value component and a handful of retirement planning benefits. However, permanent life insurance is generally more expensive than term life insurance, which only lasts for a specific amount of time.

Nonforfeiture benefits: How do they work?

Nonforfeiture benefits are a feature of permanent life insurance policies, long-term disability insurance, and long-term care insurance policies. They are designed to protect the insured in the event that they can no longer pay their premiums or if they surrender their policy. Nonforfeiture benefits give the policyholder the right to retain some benefits or cash value even if they stop paying premiums. This ensures that the policyholder does not lose the entire value of their policy or investments.

To benefit from a nonforfeiture clause, the insured will usually have had to make premium payments for at least three years. Once this marker has been hit, the nonforfeiture clause can be activated in two ways: the insurance company automatically applies the nonforfeiture clause because the policyholder failed to make premium payments, or when a policyholder requests the nonforfeiture to be invoked on their policy.

There are several nonforfeiture benefit options available to policyholders:

• Cash surrender value: The policy owner terminates the policy and receives the remaining cash value within six months.
• Extended-term insurance: The policy owner uses the cash value to purchase a term insurance policy with a death benefit equal to that of the original whole life policy.
• Loan value of the policy: The policy owner takes out a loan against the policy's cash value. Unlike a regular loan, this does not need to be paid back, but any money taken out will be deducted from the death benefit that goes to the policyholder's beneficiaries.
• Paid-up insurance: The policy owner uses the cash value to buy a paid-up version of the same type of life insurance policy, so they no longer have to make premium payments.

Nonforfeiture options: What are they?

Nonforfeiture options are included as provisions or clauses in certain life insurance policies to allow policyholders to retain some form of reduced paid-up insurance if they discontinue premium payments after a period of time. Nonforfeiture options are only available for life insurance with cash value, which is an additional benefit included with some permanent life insurance policies.

Nonforfeiture options are triggered when you stop paying your premiums or you cancel your policy. If you stop paying the premiums or cancel your policy outright, you can lose or forfeit your coverage. However, policies with life insurance cash value can include nonforfeiture options, which let you keep some insurance and financial benefits even after you stop paying.

A nonforfeiture clause is an insurance policy clause stipulating that an insured party can receive full or partial benefits or a partial refund of premiums after a lapse in their policy. Permanent life insurance, long-term disability, and long-term care insurance policies may have nonforfeiture clauses.

Policyholders can choose from four different life insurance nonforfeiture options: cash surrender value, extended-term insurance, loan value, and paid-up insurance.

Cash Surrender Value

Within six months of the policyholder surrendering the policy, they will be able to receive the accumulated portion of a permanent life insurance policy’s cash value. Depending on the age of the policy, the cash surrender value could be less than the actual cash value.

Extended-Term Insurance

The extended-term nonforfeiture option allows the policyholder to use the cash value to purchase a term insurance policy with a death benefit equal to that of the original whole-life policy. This allows the policyholder to stop paying the premiums but not forfeit the equity of their policy.

Loan Value of Policy Loans

The option of a policy loan is not like a regular loan — it does not need to be paid back. Any money that is taken out will be deducted from the death benefit that goes to the policyholder’s beneficiaries. You will be charged between 5% and 9% interest on the loan.

Reduced Paid-Up Insurance

Going with one of the first two nonforfeiture benefits will forgo your ability to continue to accumulate cash value. Reduced paid-up insurance is the only option that allows the policyholder to keep a portion of his or her original death benefit while continuing to benefit from the original policy attributes like guaranteed cash value and dividends. When this option is selected, the insurance company cancels contract premiums for all future years of the policy. This change in the contract will also cause a change to the death benefit. Since the insurance company will no longer be receiving premiums, they adjust the death benefit down to match the value of the paid-up insurance in the policy.

Frequently asked questions