What is the definition of Nonforfeiture Options?
Nonforfeiture options refer to the different ways that the policyowner can make use of the cash surrender value in the event that he decides to stop paying the premiums. This means that the premiums that were previously paid towards the policy are not forfeited.
When the policy lapses because premiums are not paid, the policyowner has several options regarding the policy.
Cash Surrender Option - He can opt to get the cash value of the policy and the insurance company will pay this amount to him. The cash received is taxed as ordinary income. In this case, the policy will not be reinstated.
Extended Term Option - He can also convert the coverage to term insurance and the cash value will pay for the premiums of the term insurance that offers the same face amount as the original policy. The length of the coverage will depend on the cash value of the policy.
Reduced paid-up insurance - He can opt to use the cash value to buy insurance coverage for the same period as the original policy. However, the face amount will be smaller, as this will depend on how much insurance the cash value will buy.
These are just some of the nonforfeiture options in a life insurance policy. Annuities also offer several nonforfeiture options.
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