Glossary
Non-forfeiture options, defined
The choices a permanent policy gives an owner who stops paying premiums but has built cash value, so that the accumulated value is not simply lost. The usual three are taking the cash, converting to a smaller fully paid policy, or keeping the full face amount as term coverage for as long as the cash value will buy.
In practice
Cash surrender ends the coverage and can create taxable income if the value exceeds the premiums paid. Reduced paid-up keeps the policy alive for life with no further premium, at a smaller face amount set by the insured's age and the cash value. Extended term keeps the original face amount for a fixed number of years and days, printed in a table in the policy, after which nothing remains. Policies name a default that applies if the owner does nothing after a lapse, often extended term. The table of guaranteed cash values in the policy shows each choice year by year, and reviewing it before letting a policy go is basic housekeeping.
A worked example
Suppose a whole life policy with a $100,000 face amount has $18,000 of cash value after twenty years and the owner stops paying. She could take the $18,000, keep perhaps $40,000 of coverage paid for life, or keep the full $100,000 as term coverage for a period the policy's table sets, say fifteen years. Hypothetical figures.
Applies to: Life Insurance