A nonforfeiture clause is a provision in a policy that states that an insured party may receive from the insurance companies full or partial benefits or a partial refund of premium payments if the policy lapses due to missed premium payments.
Nonforfeiture clauses (nonforfeiture values) are common in standard life insurance and long-term care insurance. This insurance policy clause could involve returning a portion of the total paid-up premiums, the policy’s cash surrender value, or a reduced death benefit based on total premiums paid.
In today’s feature, we will go over the key aspects of the Nonforfeiture Option. We will cover subsequently:
- How does the nonforfeiture clause work?
- What are the nonforfeiture options available?
- Which nonforfeiture option continues to increase accumulated cash value?
How Does The Nonforfeiture Clause Work?
Nonforfeiture options become available when the policy owner chooses to surrender or stop paying premiums. The insurance company guarantees a minimum cash value for the insurance policy after a defined period, usually three years from the date the policy is placed in force. The state laws ensured that when the policy lapses after a grace period, accumulated cash values are untouchable by insurance commissioners.
The owner of a traditional whole-life policy chooses one of four ways 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 inconsistent investing. Also, if a policy’s sub-account performance is poor or credited interest rates are low, reduced paid-up insurance or extended insurance may be reduced.
Nonforfeiture benefits available to life insurance policyholders include cash surrender value, extended term insurance, loan value, and paid-up insurance.
If you fail to pay premiums during the grace period, you will not lose your life insurance. Instead, your accumulated cash value is protected by the state law and gives you these options:
- Cancel your policy and receive the cash surrender value in cash.
- Choose to have reduced coverage for the remainder of the policy’s term with no future premiums, in short, paid-up insurance.
- Pay future premiums with your cash value, also known as an automatic premium loan.
Nonforfeiture Clause – Payout Options
The death benefit is no longer available after the policy is surrendered. In addition, some life insurance companies include an annuity option in the nonforfeiture clause. The remaining cash value can be used to buy an annuity with no commissions or fees.
Cash Surrender Value
Under the nonforfeiture cash payment option, the insurance company pays the remaining cash value within six months. Keep in mind that the policy cannot be reinstated, it is permanently terminated.
The name of this nonforfeiture benefit refers to the savings component of the whole life insurance policies that are payable before death. However, the savings portion of permanent life insurance provides very little return compared to the premiums paid in the early years.
The cash surrender value of permanent life insurance is the accumulated portion of the policy’s cash value that is available to the policy owner upon surrender of the policy.
The cash surrender value may be less than the actual cash value depending on the age of the policy. A life insurance company can deduct fees on cash surrender in the early years of a policy.
Depending on the policy type, the cash value is available to the policyholder for the rest of his life. It’s worth noting that surrendering a portion of the cash value reduces the death benefit.
The death benefit and life insurance coverage are no longer available after the policy is surrendered. Outstanding loan amounts are satisfied with the cash value prior to issuing payment to the policy owner.
Extended-Term Insurance Policy
The extended-term payout option allows the policy owner to purchase extended-term insurance with the death benefit equal to the one from the original policy. The length of the new policy will be in effect is determined by the cash values available from the original life insurance policy and the insured party’s age when the extended-term option is selected.
In some cases, some life insurance companies will automatically provide an extended-term option if the original coverage lapses due to missed premium payments. Extended-term insurance also allows the policy owner to quit paying premiums on the original policy while keeping the policy’s equity.
Extended-term insurance is frequently the default nonforfeiture option offered by the insurance company. The face amount of the policy remains the same with extended-term life insurance, but it is flipped to extended-term insurance. Meanwhile, the equity you’ve built is used to buy a term policy for the number of years you have paid premiums.
Reduced Paid-up Insurance
The Reduce paid-up option allows the whole life policy owner to keep a portion of their death benefit in force while continuing to benefit from different permanent life insurance features such as guaranteed cash value accumulation and dividends. When you use this nonforfeiture benefit, the original cash value becomes a single premium used to purchase a paid-up life insurance policy right away.
The policy owner receives a lower amount of payments made as premium payments for the original whole life policy in a reduced paid-up policy option. The paid-up option allows the policyholder to keep the death benefit without having to pay any further premiums.
On the other hand, the death benefit payable to the new policy owner’s surviving dependents is less than the original life insurance cash value. The reduced paid-up life insurance coverage is determined by the insured’s attained age, cash surrender value, and the number of paid-up premiums by the policy owner. Before being eligible for paid-up insurance, insurers require policyholders to have paid at least three years of premiums.
An alternative nonforfeiture option. Unlike standard loans, it does not have to be repaid. Any money you withdraw will simply be deducted from the death benefit that will be distributed to your beneficiaries. Unfortunately, just like any conventional loan, the insurance company charges interest on said loan. That interest can range from 5% to 9% and if unpaid, it will be added to your loan.
Which Nonforfeiture Option Continues to Increase Accumulated Cash Value?
The reduced paid-up insurance is the only option that will continue to accrue cash value. It will accomplish this by accumulating guaranteed interest and paying dividends, assuming the dividend option is set to paid-up additions.
What Are the Paid-up Additions?
Paid-up additional insurance is additional whole life insurance coverage purchased with dividends from the policy rather than premiums. A whole life policy can be supplemented with paid-up additional insurance as a paid-up rider.
Paid-up additions earn dividends, and the value compounds continuously over time. Paid-up additions can also be surrendered for your policy value or lent against by the policyholder.
Take Advantage of Your Whole Life Insurance Policy – The Infinite Banking Concept
Nonforfeiture options do not have to be your only option to gain money. The Infinite Banking Concept enables the funds needed for you to fulfill your wishes. Learning how to manage your assets according to the rules of Infinite Banking creates a new world full of possibilities where nothing is out of your financial reach.
Infinite banking allows you to operate and borrow money the same way a traditional bank does, but without relying on a third party. You will be a creditor as well as a lender.
Instead of borrowing from a bank, you borrow money from yourself and control your cash flow while still allowing your whole life insurance policies to earn dividends (money) even though you are using the funds elsewhere. In other words, you accumulate wealth by borrowing and repaying the capital contained in the cash value (death benefit) of your permanent life insurance policy.
That is one of the most significant benefits of whole life insurance policies, and what is more – you will never have to deal with banking fees or loan interest rates. You can borrow money as a policyholder using your policy’s cash value. You would never have to borrow from a bank again if you used this borrowing setup. Instead, you would borrow for yourself (life policy loans) and pay yourself back over time. As a result, you are your own bank.
Infinite banking’s goal is to replicate the process as much as possible to increase your own bank’s value. The lending and repayment of money typically held in the cash value of a permanent life insurance policy occurs during the duplication process.
Infinite banking enables you to better work toward your individual and unique financial goals for yourself and your family and maintain control over your finances without the drawbacks of dealing with banking fees or interest rates.
Infinite banking involves:
- Overfunding (with after-tax funds) a high cash value permanent life policy from a life insurance company is what Infinite Banking entails.
- Cash Value Accumulation (tax-free) You have been a policyholder of your Whole Life insurance policy for many years.
- Loans made tax-free against the cash value of your whole life insurance policy to be used for personal expenses.
You gain financial freedom and control of your money by borrowing for yourself, repaying, and so on – simply by being your own bank.
Implementing this banking strategy into your life gives you much better control over your finances and aids in the accumulation of wealth through the use of a life insurance policy.
We hope that we have helped you become more acquainted with your nonforfeiture options and their many advantages. However, we encourage you to learn also about the Infinite Banking Concept.
If you want to invest in your future while also gaining financial freedom, consider incorporating Infinite Banking into your retirement planning. We will teach you how to manage, make, use, and multiply your money completely independently using your whole life insurance at Wealth Nation. Sign up for Wealth Nation to learn more!