What is 'Nonforfeiture Clause'

A nonforfeiture clause is an insurance clause stipulating that an insured party can receive full or partial benefits or a partial refund of premiums after a lapse due to non-payment. Standard life insurance and long-term care insurance may have nonforfeiture clauses. The clause may involve returning some portion of the total premiums paid, the cash surrender value of the policy, or a reduced benefit based upon premiums paid before the policy lapsed.

BREAKING DOWN 'Nonforfeiture Clause'

When the owner of whole-life insurance policy opts to surrender the policy, nonforfeiture options become available. The insurance company guarantees a minimum cash value for the insurance policy after a specific period, typically three years, from when placed in force.

For traditional whole-life policies, the owner decides which of four ways they would like to access the policy’s cash value. There are no guarantees for the minimum amount of insurance available in variable and universal life policies, which allow for variable investing. Also, the amount of reduced paid-up or extended term insurance may decrease if a policy’s sub-account performance is poor or credited interest rates are low.

 

Payout Options Under a Nonforfeiture Clause

After surrendering a whole-life insurance policy, the death benefit no longer exists. Before issuing payment to the policy owner, outstanding loan amounts are satisfied from the cash value. The policy owner receives the remaining cash value within six months under the nonforfeiture cash payment option.

Choosing the nonforfeiture extended term option allows the policy owner 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. For some companies, this option may be automatic when surrendering a whole life insurance policy.

The nonforfeiture, reduced paid-up insurance option allows the policy owner to receive a lower amount of fully paid whole life insurance, excluding commissions and expenses. The attained age of the insured will determine the face value of the new policy. As a result, the death benefit is smaller than that of the lapsed policy.

Select companies offer an annuity option in the nonforfeiture clause, as well. The remaining cash value may be used to purchase an annuity free of commissions or expenses. Annuities pay regular payments as outlined in the contract.

RELATED TERMS
  1. Values

    Values are the worth of a non-forfeiture clause that specifies ...
  2. Cooperation Clause

    An insurance contract clause that requires the policyholder to ...
  3. Level Death Benefit

    A level death benefit is a life insurance payout that is the ...
  4. Add To Cash Value Option

    An add to cash value option is a life insurance policyholder's ...
  5. Term Life Insurance

    Term life insurance is a type of life insurance that guarantees ...
  6. Cash Value Life Insurance

    Cash value life insurance is permanent life insurance with a ...
Related Articles
  1. Financial Advisor

    Cash Value vs. Surrender Value: What Is the Difference?

    How much you actually receive from the cash value of your life insurance policy is based on the surrender value, which can sometimes be much lower.
  2. Insurance

    Life Insurance: Foundation to a Solid Portfolio

    Life insurance should be a foundation of an overall financial portfolio. Here's why.
  3. Insurance

    How Cash Value Builds in a Life Insurance Policy

    If you have permanent life insurance, more of your insurance premium goes to cash value in the early years of your policy.
  4. Financial Advisor

    Understanding Life Insurance Premiums

    When buying permanent life insurance, what amount of premium should you pay for the coverage?
  5. Insurance

    5 Mistakes That Can Ruin Your Life (Insurance)

    There are many reasons why it's important to have the right amount life insurance. Don't let these simple errors leave you unprotected.
  6. Insurance

    How Much Life Insurance Should You Carry?

    Before purchasing life insurance it is important to decide if you really need it, what type of policy is best, and how much coverage you should get.
  7. Insurance

    Life Insurance Policies: How Payouts Work

    Learn how to file for a life insurance payout, how long it takes to receive it, and new ways to plan for payments that provide an income stream.
  8. Personal Finance

    The Best Life Insurance for Military Families

    Two of the most common types of life insurance are term and whole life. Here's why the latter isn't a good idea for most military families.
  9. Retirement

    Life Insurance in a Qualified Retirement Plan

    The opportunity to pay life insurance premiums with pre-tax dollars is appealing, but the additional costs of requirements may outweigh the benefits.
Trading Center