Understanding Extended Term Insurance Nonforfeiture Options: A Guide To Making The Most Of Your Policy

A nonforfeiture clause is included in standard life insurance and long-term care insurance policies to protect the insured in case the policyholder stops paying premiums. This clause allows the insured party to receive full or partial benefits or a partial refund of premiums after a lapse due to nonpayment. Life insurance policyholders can choose from four nonforfeiture benefit options: cash surrender value, extended-term insurance, loan value, and paid-up insurance.

Extended-term insurance is one of the nonforfeiture options available to policyholders. This 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. The policyholder can stop paying premiums but will not forfeit the equity of their policy. The face amount of the policy remains the same, but it is converted to an extended-term insurance policy. The policyholder's built-up equity is used to purchase a term policy equal to the number of years they paid premiums.

Extended-term insurance allows the policyholder to retain the death benefit without paying future premiums

Extended-term insurance is a type of life insurance that allows policyholders to retain their death benefit without paying future premiums. It is a nonforfeiture option available in permanent life insurance policies, long-term disability, and long-term care insurance policies. This option enables policyholders to use the cash value of their original policy to purchase a term insurance policy with the same death benefit.

Extended-term insurance provides policyholders with the flexibility to stop paying premiums without forfeiting the equity of their original policy. The length of the new term policy depends on the cash value available from the original policy and the insured's age. It is important to note that the face amount of the policy remains unchanged, but it is converted into an extended-term insurance policy.

When choosing the extended-term nonforfeiture option, the policyholder's built-up cash value will be utilized to purchase a term policy equivalent to the number of years they have been paying premiums. For instance, if an individual purchased a policy at 20 years old and paid premiums until they turned 55, they would receive a term policy of less than 35 years. Similarly, if they bought the policy at 35 and paid until 45, the resulting term policy would be for less than 10 years.

Extended-term insurance is often the default nonforfeiture option selected by insurance companies. It allows policyholders to maintain their coverage without any additional premium payments. However, it is crucial to understand that the cash value of the policy will be reduced by the amount of any outstanding loans against the life insurance.

By selecting the extended-term insurance option, policyholders can retain their current death benefit for a set period without the need for further premium payments. This option ensures that policyholders can continue their life insurance coverage even if they face financial difficulties or choose to discontinue premium payments.

The policyholder can use the cash value to purchase a term insurance policy

A nonforfeiture clause is an insurance policy clause that is included in standard life insurance and long-term care insurance. It stipulates that a policyholder will not lose the value of their policy if they discontinue premium payments or surrender their policy.

Extended-term insurance is one of the nonforfeiture options available to policyholders. This 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. The policy is calculated from the insured's attained age. The term policy ends after a fixed number of years, as detailed in the policy's nonforfeiture table.

Extended-term insurance allows a policyholder to stop paying premiums but not forfeit the equity of their policy. The amount of cash value built up in the policy will be reduced by the amount of any loans against the policy.

Extended-term insurance is often the default nonforfeiture option. With extended-term insurance, the face amount of the policy remains the same, but it is converted to an extended-term insurance policy. Meanwhile, the equity built up is used to purchase a term policy that equals the number of years premiums were paid.

For example, if a policyholder purchased a policy at age 20 and paid premiums until age 55, they would receive a term policy for less than 35 years. If the policyholder purchased the policy at age 35 and paid until age 45, they would receive a term policy for less than 10 years.

Other Nonforfeiture Options

There are three other nonforfeiture options available to policyholders:

• Cash Surrender Value: The policyholder can terminate the policy and receive the remaining cash value within six months. This option applies to the savings element of whole life insurance policies payable before death. However, during the early years of a whole life insurance policy, the savings portion brings little return compared to the premiums paid.
• Loan Value of Policy Loans: The policyholder can take out a loan using the cash value as collateral. This option is not like a regular loan as it does not need to be paid back. However, any money taken out will be deducted from the death benefit that goes to the policyholder's beneficiaries. The policyholder will be charged interest on the loan, typically between 5% and 9%.
• Reduced Paid-Up Insurance: The policyholder can use their cash surrender value to buy a paid-up version of the same type of life insurance policy, so they no longer have to make premium payments. However, surrendering a portion of the cash value reduces the death benefit, and the cash value will grow at a reduced rate.

Considerations for Policyholders

When deciding whether to use the cash value to purchase a term insurance policy or choose another nonforfeiture option, policyholders should consider the following:

• The extended-term option allows policyholders to maintain their life insurance coverage without paying additional premiums.
• The cash surrender value option provides a lump-sum payment, but the policy is cancelled and cannot be reinstated.
• The loan value of policy loans allows policyholders to access cash without repaying the loan, but it will reduce the death benefit.
• The reduced paid-up insurance option allows policyholders to maintain life insurance coverage without paying additional premiums, but the death benefit will be reduced.

The nonforfeiture option may be triggered if the policyholder stops paying premiums or cancels the policy

A nonforfeiture clause is a provision in a life insurance policy that allows the policyholder to receive benefits or a refund of premiums after a lapse in their policy. This clause is triggered when a policyholder stops paying premiums or cancels their permanent life insurance policy.

When a policyholder stops paying premiums or cancels their policy, they have several options to choose from to receive their policy's cash value:

Cash Surrender Value

The policyholder can choose to terminate their policy and receive the remaining cash value within six months. This option is a lump-sum payment that applies to the savings element of whole life insurance policies. However, during the early years of a whole life insurance policy, the savings portion may bring little return compared to the premiums paid. The cash surrender value could be less than the actual cash value, depending on the age of the policy.

Extended-Term Insurance

The policyholder can use the cash value to purchase a term insurance policy with a death benefit equal to that of the original whole life policy. This option allows the policyholder to stop paying premiums but retain the equity of their policy. The face amount of the policy stays the same, but it is converted to an extended-term insurance policy. The policyholder can purchase a term policy that equals the number of years they paid premiums.

Reduced Paid-Up Insurance

The policyholder can use the cash surrender value to purchase another permanent life policy of the same type with a single lump-sum payment. This option results in a reduced death benefit but allows the policyholder to maintain coverage without future premium obligations. The death benefit for beneficiaries will be less than the cash value in the original policy.

Automatic Premium Loan

The policyholder can borrow the amount of lapsed payments from their policy's accumulated cash value. This option is only available when the lapsed premium amount is less than or equal to the policy's cash value.

Single-Premium, Immediate Annuity

The policyholder can convert their policy to an annuity, which will pay the policy owner an amount for the rest of their life, based on the cash value of the lapsed or surrendered policy and the policy owner's age.

It is important to note that the availability of these options may vary depending on the insurance company and the specific circumstances of the policyholder. The tax implications of choosing a non-forfeiture option may also vary depending on the jurisdiction. Consulting a financial advisor can help policyholders understand the potential tax consequences and make an informed decision.

The policyholder can choose from four nonforfeiture options, including extended-term insurance

A nonforfeiture clause is an insurance policy clause that is included in standard life insurance and long-term care insurance. It stipulates that a policyholder will receive a partial or full refund of premiums paid if the policy lapses after a defined period due to missed premium payments. The clause may also become available when the holder of a whole life insurance policy surrenders the policy.

When the owner of a whole life insurance policy surrenders the policy, they have several nonforfeiture options. The insurance company guarantees a minimum cash value for the insurance policy after a specific period, typically three years from when the policy starts.

The four nonforfeiture options available to policyholders are:

• Cash Surrender Value: The policy owner terminates the policy and receives the remaining cash value within six months. The cash surrender value is the accumulated portion of a permanent life insurance policy's cash value that is available to the policyholder upon surrender of the policy.
• Extended-Term Insurance: The policyholder uses the cash value to purchase a term insurance policy with a death benefit equal to that of the original whole life policy. The policyholder can stop paying premiums but will not forfeit the equity of their policy.
• Loan Value: The policy loan option allows the policyholder to borrow against the death benefit that goes to their beneficiaries. Unlike a conventional loan, the policy loan does not need to be paid back, but any money borrowed will be deducted from the death benefit.
• Paid-up Insurance: The policyholder uses their cash surrender value to buy a paid-up version of the same type of life insurance policy, so they no longer have to make premium payments. The death benefit will be reduced, and the policy will retain a cash value component that grows at a reduced rate.

If the policyholder does not choose any of the above options after the policy is terminated or surrendered, the insurance company will generally stipulate a default option in the life insurance policy. The Extended Term Option is often the default choice.

Extended-term insurance is often the default nonforfeiture option

For example, if a policyholder purchased a policy at 20 years old and paid premiums until the age of 55, they would receive a term policy of less than 35 years. On the other hand, if they purchased a policy at 35 years old and paid until 45, they would receive a term policy of less than 10 years. This option ensures that policyholders do not lose their coverage and can continue to enjoy the benefits of their insurance plan.

It is important to note that the extended-term option may be offered as an automatic choice if the original coverage lapses due to missed premium payments. This provides policyholders with the flexibility to discontinue premium payments while retaining the equity accumulated in their policy. However, the length of the new policy will depend on the available cash values from the original policy and the insured's age when choosing the extended-term option.

In addition to the extended-term option, policyholders have other nonforfeiture options available, such as reduced paid-up insurance and cash surrender value. These options allow policyholders to either retain their coverage with a reduced death benefit or receive a lump-sum payment for their cash value balance, respectively. Ultimately, the extended-term insurance option is a valuable choice for policyholders who want to maintain their coverage without incurring additional premium payments.

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