Nonforfeiture Options
State-required options letting a lapsed permanent policyowner preserve value: cash surrender, reduced paid-up insurance, or extended term insurance.
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Practice This Concept
A policyowner stops paying premiums, has not taken a paid-up policy, and makes no nonforfeiture election. If the policy's nonforfeiture provision designates a default option, the coverage is most commonly converted to:
Extended term insurance using the cash value as the single premium — Under the nonforfeiture provisions of a life policy, when a policy lapses after cash value exists and the owner makes no election, the typical automatic option is extended term insurance: the cash value is used as a net single premium to buy term coverage equal to the policy's face amount for as long as the cash value will support it. This keeps the full death benefit in force for a limited period without further premiums. The other nonforfeiture options, cash surrender and reduced paid-up, require an affirmative election in most policies.
National insurance concept
If a whole life policy lapses with sufficient cash value and the policyowner has made no nonforfeiture election, most policies will automatically:
Apply the net cash value to purchase paid-up term insurance equal to the original face amount for as long as the value lasts — When no election is made at lapse, the automatic nonforfeiture option in most whole life policies is extended term insurance: the net cash value is used as a single premium to buy term coverage equal to the original face amount, which continues for as long as the cash value can support it. The three nonforfeiture options are cash surrender, reduced paid-up, and extended term. Because most policyowners do not make an election, the automatic extended term option protects the insured from losing all coverage. If the cash value is exhausted, coverage ends without further value. This rule reflects the law's concern that cash values should never be forfeited by a lapse.
National insurance concept
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