Non-forfeiture Options - Life Insurance Exam Prep

Summary

This video explains the three main non-forfeiture options in whole life insurance policies, which are crucial for anyone studying for a life insurance licensing exam. The options include Cash Surrender Value, Extended Term, and Reduced Paid-Up Insurance. These allow policyholders to either surrender their policy for cash, convert it to a term policy, or purchase a reduced, fully paid-up policy using accumulated cash value. The video also highlights key tax considerations and explains how these options help policyholders retain value even when they can no longer continue premium payments.

Takeaways

• 😀 Non-forfeiture options apply to whole life insurance policies that have cash value.
• 😀 A non-forfeiture option allows policyholders to exercise choices when their policy lapses, is surrendered, or canceled.
• 😀 The three primary non-forfeiture options are cash surrender value, extended term, and reduced paid-up insurance.
• 😀 The cash surrender value option allows policyholders to surrender the policy and access the accumulated cash value.
• 😀 If the cash value exceeds the premiums paid, policyholders must pay tax on the excess amount as ordinary income.
• 😀 The extended term option allows policyholders to use the cash value to purchase a term policy with the same face value as the whole life policy.
• 😀 The extended term option covers a term policy for as long as the cash value can prepay it.
• 😀 The reduced paid-up option allows policyholders to use the cash value to purchase a reduced permanent whole life policy without needing to make further premium payments.
• 😀 Under the reduced paid-up option, the policy continues to earn dividends and build cash value, but no future premium payments are required.
• 😀 The non-forfeiture options allow policyholders to maintain some form of life insurance even after stopping premium payments or surrendering the policy.
• 😀 Understanding these non-forfeiture options is important for passing the life insurance pre-licensing exam.

Q & A

What are non-forfeiture options in whole life insurance?

Non-forfeiture options are alternatives available to policyholders when a whole life insurance policy ends, such as through surrender, lapse, or cancellation. These options allow the policyholder to retain the cash value in some form, rather than losing it completely.

Why are non-forfeiture options relevant to whole life insurance?

Non-forfeiture options are relevant to whole life insurance because they allow policyholders to access the cash value that builds up over time in the policy, even if they are no longer making premium payments.

What is the cash surrender value option?

The cash surrender value option allows the policyholder to surrender their whole life insurance policy in exchange for the cash value accumulated in the policy. The policyholder can either take a loan against the cash value or surrender the policy for the full amount.

What happens if the cash value is higher than the premiums paid in a whole life insurance policy?

If the cash value exceeds the premiums paid, the policyholder must pay tax on the excess amount as ordinary income, as it represents a gain from the policy.

What is the extended term non-forfeiture option?

The extended term option allows the policyholder to use the cash value to purchase a term policy with the same face amount as the original whole life policy. The term policy remains in force for a period determined by the available cash value, but no further premiums are due.

How does the extended term option work in practice?

For example, if a whole life policy has $5,000 in cash value, it can be used to purchase a term policy with a $50,000 face amount. If the cash value covers 12 years of premiums, the policyholder will have a $50,000 term policy for that duration without needing to make further payments.

What is the reduced paid-up option?

The reduced paid-up option allows the policyholder to use the cash value to purchase a paid-up whole life insurance policy for a reduced face amount. No additional premium payments are required, and the policy continues to accumulate cash value.

How does the reduced paid-up option differ from the extended term option?

Unlike the extended term option, which converts the policy into a term policy, the reduced paid-up option provides a permanent whole life policy with a smaller face amount, and no further premium payments are needed.

Can a policyholder reinstate a policy after using the cash surrender value option?

No, once the policyholder surrenders the policy and takes the cash surrender value, the policy is no longer in force, and it cannot be reinstated.

What happens to the policy if the cash surrender value is taken out?

If the cash surrender value is taken out, the policyholder no longer has life insurance coverage, and the policy is terminated. The policyholder may also be subject to surrender charges, though these are typically minimal.