What Is a Nonforfeiture Option in Whole Life Coverage?

What is a nonforfeiture option? This insurance clause lets you receive either a partial premium refund or benefits if your payments lapse. You might have a nonforfeiture option in your permanent life, long-term disability or long-term care insurance policy.

What Is a Nonforfeiture Option?

A nonforfeiture option for a whole life insurance policy takes effect if you decide to stop paying your premiums. In this situation, you'll have several paths to access the guaranteed cash value of this type of policy:

• Request the cash surrender value of the policy and end your coverage. You'll get the amount, which is the savings aspect of your whole life policy, within 6 months of surrendering coverage. Sometimes, the cash surrender value is lower than the policy's actual cash value, especially in the first few years after you buy life insurance because you'll owe fees upon surrender. 
• Use the accumulated cash value of the policy to pay premiums moving forward.
• Maintain reduced coverage until the cash value of your policy runs out, with no future payments due. Your age at the time of surrender will determine the amount of reduced coverage. 
• Purchase term coverage with the value of the policy.

Some life insurance providers also let you use the guaranteed cash value to buy an annuity. This type of investment creates a source of regular income.

If you've taken out a loan against the value of your policy, the insurance company will reduce the cash surrender value of your policy by the outstanding amount at surrender. You'll also have to pay 5% to 9% interest.

How Do Extended Term Nonforfeiture Options Work?

If you decide to buy a term life policy with the cash value of a surrendered whole life policy, the length of the term will vary based on your age and the nonforfeiture table established by your life insurance provider. This strategy lets you keep the equity in your policy minus the value of loans. The policy's face value remains the same.