What is Values
Values are the worth of a non-forfeiture clause that specifies that an insured party would receive the equity from a life insurance policy, in the event that the policy were canceled because the premium payments were not made. The policy's value would be returned to the policy holder in some manner, either through a partial refund of the premiums that had been paid to date, or through the payment of a portion of the benefits.
BREAKING DOWN Values
Life insurance policy holders can select one of four non-forfeiture benefit options: the cash surrender value, extended term insurance, loan value and paid-up insurance. If the policy holder does not make a selection, the terms of the policy will generally stipulate which option would go into effect, in the event that the policy lapses or is surrendered.
Cash Surrender Value
Cash surrender value 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 very little return compared to the premiums paid. 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. Depending on the age of the policy, the cash surrender value could be less than the actual cash value. In the early years of a policy, life insurance companies can deduct fees upon cash surrender. Depending on the type of policy, the cash value is available to the policyholder during his lifetime. It is important to note that surrendering a portion of the cash value reduces the death benefit.
Extended Term Insurance
Extended term insurance allows a policyholder to quit paying the premiums but not forfeit the equity of their policy. The amount of cash value you will have built in your policy will be reduced by the amount of any loans against it. Extended term insurance is often the default non-forfeiture option. With extended term insurance, the face amount of the policy stays the same, but it is flipped to an extended term insurance policy. Meanwhile, the equity you built is used to purchase a term policy that equals the number of years you paid premiums.
For example, if you purchase a policy when you were 20 years old and you paid until age 55, you would receive a term policy that is less than 35 years. Or if you were 35 years old when you purchased your policy and you paid until you were 45 years old, you would receive a term policy less than 10 years.
Unlike a conventional loan, policy loans don't need to be paid back. Any money you take out will simply be deducted from the death benefit that goes to your beneficiaries. However, just like a conventional loan, you’ll be charged interest, ranging anywhere from 5 percent to 9 percent on the loan. Unpaid interest will be added to your loan amount and will be subject to compounding.
A policyholder can opt to roll the cash value of their whole life policy into paid-up insurance. In such a scenario, the policy is not necessarily paid up in the strict definition of the term, but it is capable of making its own premium payments. Depending on the type of policy and how well it has performed, a policyholder may have to resume premium payments in the future, or it may reach a point where the premiums are covered for the rest of the life of the policy.