Nonforfeiture Options

Cash Payment

the policyowner receives a check for the amount of the dividend.

reduction of premium payments

allows the policyowner to use the dividend to offset the cost of a future premium payment.

Dividend options

Choices available to PO for settling dividend payments. 1. Cash payments 2. reduction of premiums 3. accumulated at interest 4. paid up additions 5. one year term

Nonforeiture Options

Guarantees that are required by law to be part of life insurance policies that build cash value. Insurers are required to make nonforfeiture values available when policyowners discontinue premium payments for any reason. Insurers are required to provide a table of guaranteed nonforfeiture values to policyowners for at least a 20-year period with the policy. This table is specific to the coverage purchased and shows each of the nonforfeiture options after a certain number of years. There are three nonforfeiture options: Cash surrender Extended term insurance Reduced paid-up insurance

Accumulated at interest

allows the insurer to retain the dividend to be invested and grow in value. The dividend earns a rate specified in the policy. The policyowner can withdraw the dividend at will tax-free, but any interest earned on the dividend is taxable. Dividends left to accumulate at interest are separate from the policy's cash value.

Nonforfeiture options

1. reduced paid up insurance 2. extended term 3. cash surrender value

Paid up additions

allows the policyowner to use the dividend as a single premium to purchase an additional amount of whole life coverage. The amount of coverage that can be purchased is based on the insured's attained age when the paid-up addition is purchased. A new policy is not issued with paid-up additions. Instead, the paid-up addition coverage is added onto the policy's face amount. Insurers usually require that the type of coverage purchased with paid-up additions is the same type as the original policy. If the policyowner does not select a dividend option, the insurer will automatically use the paid-up additions option. Do not expire--they are added on to the policy's face amount. appropriate for policyowners who wish to maximize policy death benefits for the policy beneficiary or who are concerned with long-term benefits. By purchasing more life insurance, the policyowner who selects the paid-up addition is maximizing the death benefits for the intended beneficiary.

One year term option

fifth dividend option allows the policyowner to use the dividend as a single premium to purchase one-year term protection. The amount of the term coverage is based on the insured's attained age, and the face amount can be no more than the amount of the policy's cash value. If the insured dies while the one-year term coverage is in effect, the insurer will pay the face amount on both the permanent policy and the one-year term coverage.

Extended term option

permits the policyowner to use the policy's cash values to buy paid-up term insurance. The cash values act as a single premium to purchase the extended term coverage, and the amount of the paid-up coverage is equivalent to the original policy's face value. The length of the term protection is based on the amount of cash value in the original policy and the insured's age at the time the extended term is purchased. Any outstanding policy loans plus interest would be deducted from the cash surrender value prior to purchasing extended term coverage. The insurer institutes the extended term option by default if the policyowner cannot be reached after the grace period lapses or if the policyowner does not select a nonforfeiture option. However, if the insured has a rated policy, meaning the insured is a higher risk, the insurer will typically not offer the extended term option because of adverse selection. With the extended term option, the original policy may be reinstated within the terms of the reinstatement provision.

Reduced paid-up

allows the policyowner to purchase paid-up whole life coverage at a reduced face amount based on the amount of the policy cash value. The cash value acts as a single premium to purchase reduced paid-up insurance. Any outstanding policy loans plus interest would be deducted from the cash surrender value prior to purchasing reduced paid-up insurance. In other words, the reduced paid-up nonforfeiture option provides continuing cash value build up, even though the policyholder is no longer contributing any money into the policy. The policy may be reinstated to the original face amount within the terms of the reinstatement provision. Key points about the Reduced Paid-up Option: -The policy is paid-up with the cash value used as a single premium to purchase the reduced face amount coverage. -No more premium payments are made. -The insured's attained age is used to determine the amount of reduced paid-up coverage. -Reduced paid-up insurance is the same type of whole life coverage as the original policy, except all policy riders are eliminated.

Cash Surrender option

allows the policyowner to receive the policy's cash value. In most states, policies that build cash value must begin to accrue cash value by the end of the third policy year. For industrial life policies, cash value must be available after five years. During the first two policy years, premiums are used to pay acquisition and administrative expenses. Once the cash surrender value is exercised, no death benefit will be paid and the policy cannot be reinstated. Any outstanding policy loans plus interest would be deducted from the cash surrender value. A surrender fee is charged at the time of cash surrender. Depending on the state, the insurance company may be permitted to delay payment of cash surrender for up to 6 months from the request. This is called the delayed payment provision and provides insurance companies a buffer if they encounter a financial crisis.