Nonforfeiture Options

Basilio Renn can no longer afford the premium on his whole life policy, which carries a waiver of premium rider, a children term rider, and an accidental death rider. He elects the REDUCED PAID-UP nonforfeiture option. He assumes his three riders continue because he paid for them for many years. What actually happens to the riders?

1. A.All three riders continue at full benefit, since reduced paid-up insurance keeps the original contract in force.Wrong. The contract continues in reduced paid-up form, but the riders were funded by the premium that has now stopped.
2. B.All three riders are reduced proportionately along with the base coverage and continue at the smaller amount.Wrong. Riders do not scale down; they terminate. Only the base death benefit is reduced and continued.
3. C.The riders generally terminate, because they are funded by ongoing premium and no premium is payable under reduced paid-up insurance; only the reduced base coverage survives.Correct. Ending premium payments ends the rider benefits, which is exactly why the nonforfeiture election has this hidden cost.
4. D.Only the waiver of premium rider terminates, since there is no longer a premium to waive, and the other two continue.Wrong. The reasoning about waiver is sound, but the same absence of premium ends the children term and accidental death riders as well.

Why: Riders are attachments to a base contract and depend on it. They are supported by the rider premium the owner pays, and they generally terminate when the owner stops paying premiums, which is precisely what electing a nonforfeiture option does. Under reduced paid-up insurance the cash value is applied as a single premium to buy a smaller amount of permanent coverage on which no further premium is ever due, and because no premium is being paid, there is nothing funding the riders. The same result follows under extended term insurance and on surrender. What survives is the reduced base death benefit only. This is an important planning point rather than a technicality: an owner who values a waiver of premium or an accelerated benefit feature should understand that a nonforfeiture election strips those features away even though the base coverage continues.

A new policyowner is looking for the face amount, the premium, the policy date, the issue age and the year-by-year guaranteed cash and nonforfeiture values for HER particular contract, rather than general language explaining how the provisions operate. Where in the policy are these found?

1. A.In the entire contract provision.The entire contract provision states which documents make up the contract, typically the policy plus the attached application. It contains no figures for this policy.
2. B.In the insuring clause.The insuring clause is the insurer's basic promise to pay the death benefit on due proof of death. It identifies the promise, not the numbers.
3. C.In the consideration clause.The consideration clause states what the owner gives in exchange for the promise, namely the application and payment of premium. It does not carry the policy data.
4. D.On the POLICY SCHEDULE, or specifications page, together with the TABLE OF GUARANTEED VALUES.Correct. The schedule page carries the data unique to this contract, and the table of guaranteed values lists the year-by-year cash, paid-up and extended term figures.

Why: Every life policy separates general contract language, which is identical across all policies on that form, from the data unique to one contract. The POLICY SCHEDULE, sometimes called the specifications or data page, carries the insured's name, issue age, policy date, face amount, premium and rider list, and the TABLE OF GUARANTEED VALUES sets out the guaranteed cash value, paid-up insurance and extended term figures year by year. The provisions elsewhere in the contract explain how those numbers are used.

Nonforfeiture options give a policyowner access to:

1. A.The death benefit while still aliveDescribes an accelerated benefit rider, which advances the death benefit to a terminally ill insured. Nonforfeiture protects something different: the cash value the owner has already built up.
2. B.The policy's cash value if it lapses or is surrenderedCorrect - they preserve cash value.
3. C.NothingDescribes the forfeiture the provision was written to prevent, and the name gives it away. Value the owner accumulated is not surrendered to the insurer merely because premiums stop.
4. D.Dividends onlyDividends belong to participating policies and depend on the insurer's results. Nonforfeiture applies to any cash-value policy, par or not, and it reaches the accumulated value rather than a share of surplus.

Why: Nonforfeiture options (cash surrender, reduced paid-up, extended term) protect the accrued cash value if the policy lapses or is surrendered.

Whole life policyowner Aurelio Santangelo, 58, can no longer afford the premiums on his $250,000 policy, which has built substantial cash value. He tells his agent he wants to keep the FULL $250,000 death benefit in force and will not pay another premium. The nonforfeiture option that fits his instruction is:

1. A.Cash surrender, which pays him the accumulated cash value in a lump sum.Incorrect. Surrendering ends the coverage entirely, so no death benefit remains.
2. B.A policy loan against the cash value, which leaves the full death benefit intact and never has to be repaid.Incorrect. A loan does not solve the premium problem, accrues interest, and any unpaid balance reduces the death benefit.
3. C.Reduced paid-up insurance, which continues coverage for the rest of his life but at a lower face amount.Incorrect. Reduced paid-up sacrifices face amount to gain lifetime duration, the opposite of what he asked for.
4. D.Extended term insurance, which uses the cash value as a single premium to buy term coverage for the full $250,000 for as long as that amount will fund.Correct. Extended term is the only nonforfeiture option that preserves the entire original face amount with no further premiums.

Why: Nonforfeiture options let an owner who stops paying premiums keep some benefit from the cash value already built. Extended term insurance applies the cash value as a single premium to purchase TERM coverage for the full original face amount, and the coverage lasts however long that single premium will buy. That is the only option that preserves the entire $250,000 with no further premiums. The trade-off is that the coverage eventually ends on a fixed date rather than lasting for life.