What is a 'Nonforfeiture Clause'

A nonforfeiture clause is a clause in an insurance policy that allows for the insured to receive all or a portion of the benefits or a partial refund on the premiums paid if the insured misses premium payments, causing the policy to lapse. Nonforfeiture clauses can be found in standard types of life insurance as well as long-term care insurance. The clause may involve returning some portion of the total premiums paid, the cash surrender value of the policy, or a reduced benefit based on the amount of premiums that were paid up until the policy lapsed.

BREAKING DOWN 'Nonforfeiture Clause'

When the owner of whole-life insurance decides to surrender a policy, nonforfeiture options become effective. After a set period of time when the policy is in force, typically three years, the insurance company guarantees a minimum cash value for the policy.

For traditional whole-life policies, the owner decides which of four ways he would like to access the policy’s cash value. However, the minimum amount of insurance available under the three options is not guaranteed for variable and universal life policies. In addition, the amount of life insurance available as reduced paid-up or extended term insurance may be lessened if a policy’s subaccount performance is poor or interest rate crediting is low.

Payout Options Under a Nonforfeiture Clause

After a whole-life insurance policy is surrendered, the death benefit no longer exists. The nonforfeiture clause comes into play when any unpaid loan amounts are taken out of the cash value before the balance is paid to the policy owner.

If the cash payment option in the nonforfeiture clause is chosen, a check for the balance of the cash value is given to the policy owner within six months.

If the extended term option in the nonforfeiture clause is chosen, the policy owner may use the cash value for purchasing term insurance with a death benefit equal to that of the whole-life policy, based on the insured’s attained age. The term policy ends after a set number of years as detailed in the policy’s nonforfeiture table. For some companies, this option may be automatic when surrendering a whole-life insurance policy.

The reduced paid-up insurance option in the nonforfeiture clause lets the policy owner receive a lower amount of fully paid whole-life insurance, excluding commissions and expenses. The cost of the insurance is based on the insured’s attained age and the amount of the cash value. The new policy pays a lower death benefit when the insured dies.

Select companies offer an annuity option in the nonforfeiture clause as well. The remaining cash value may be used for purchasing an annuity free of commissions or expenses. Regular payments are distributed as outlined in the contract.

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