Nonforfeiture Clause (How It Works: All You Need To Know)

What is a Nonforfeiture Clause?

How does it work in insurance contracts?

What are the payout options under a nonforfeiture provision?

Keep reading as we have gathered exactly the information that you need!

Let’s dig into our insurance policy and contract knowledge!

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Nonforfeiture Clause Overview

A nonforfeiture clause is an insurance contract provision allowing the insured to receive full or partial benefits or refund a portion of the premiums paid after a certain time due to non-payment of premiums.

The insurance policy’s nonforfeiture clause can also be triggered when a whole life insurance policyholder surrenders the policy.

Definition

According to The Free Dictionary by Farlex, a nonforfeiture clause is defined as:

A clause in some insurance policies entitling a policyholder to receive the benefit, or a portion of it, for a short period of time after allowing the policy to lapse.
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How It Works

After the passing of a certain period of time, nonforfeiture clauses allow the policyholder to obtain a certain guaranteed cash value should the policy be surrendered.

Many policies indicate that a minimum cash value will be available to the insured after three years.

As such, if the policy has been in force for a sufficient amount of time, the nonforfeiture values will become available to the policyholder should the policy be surrendered or terminated due to failure to make premium payments.

Typically, life insurance, long-term disability, and long-term care insurance policies may include nonforfeiture provisions.

In a permanent life insurance policy, the policyholder can access the cash value in four different ways:

  • By terminating the policy and getting the cash surrender value 
  • Choose a reduced coverage for the remaining term of the policy (paid-up policy)
  • Use the accumulated cash value to cover future premium payment obligations (automatic premium loan)
  • Acquire extended-term insurance policy with the accumulated cash surrender value without premium payment obligations 

Nonforfeiture Provision Payout Options

Life insurance policies are taken to provide benefits to the surviving dependents of the insured or policyholder in the event of death.

However, if the policyholder terminates the policy before the event of death, the insurance provider will no longer have an obligation to cover the surviving dependents.

On the other hand, the policyholder may recover some of the past premium payments.

In essence, the policyholder did not “forfeit” some of the past premium payments and will be entitled to receive it as cash value.

There are three payout options:

  • Cash surrender value
  • Extended-term option
  • Reduced paid-up insurance

Let’s look at each of these options.

Cash Surrender Value

With a cash surrender value payment option, the policyholder receives the “cash value” of the policy within a certain period of time (generally six months). 

As premiums are paid and time goes by, the cash surrender value increases over time.

The accumulated cash is applied to the savings element of the whole life insurance policy.

Extended-Term Option

The nonforfeiture extended-term option enables the insured to use the policy cash value to purchase term insurance with death benefits equal to that of the original policy.

After a certain number of years, the term policy ends based on a nonforfeiture table outlined in the policy.

The validity period of the new policy will depend on the age of the insured and the amount of cash values available in the policy.

The extended-term option is typically a default nonforfeiture payment option allowing the policy owner to quit paying premiums but retain the accumulated equity.

Reduced Paid-Up Insurance

With a reduced paid-up insurance payment option, the policyholder will receive a lower amount of payments made for the life insurance but will retain the death benefits without having an obligation to pay further premiums.

On the other hand, the death benefits the surviving dependents receive may be lower than the cash value in the original policy.

The reduced life insurance coverage will be a function of the policy owner’s age, the accumulated cash value, and the premiums paid.

Takeaways 

So what is a Nonforfeiture Clause?

How do nonforfeiture clauses work in insurance policies?

Let’s look at a summary of our findings.

Nonforfeiture Clause

  • Nonforfeiture provisions are contractual clauses found in insurance policies stating that an insured can receive full or partial benefits or potentially partial refund of premiums paid should the insured be in default of making premium payments
  • In permanent life insurance policies, there are four ways to access the policy’s cash value: by terminating the policy, by reducing coverage for the remaining term, by using accumulated cash value to pay for future premiums, or by buying an extended-term insurance policy with the policy cash value 
Acceleration clause
Accidental death benefits
Accumulated option 
Annual administrative fees 
Nonforfeiture benefit
Nonforfeiture options
Nonforfeiture values
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Extended-term insurance 
Paid-up additions 
Payor benefit rider
Permanent life insurance 
Policy riders 
Reduced paid-up insurance 
Term life insurance 
Universal life policy
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