What is 'Nonforfeiture Clause'

A nonforfeiture clause is an insurance clause that allows an insured to 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.

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