What is a nonforfeiture provision?

A nonforfeiture clause is a provision in a permanent life insurance or long-term care policy that ensures you do not lose your accumulated cash value or benefits if you stop paying premiums or cancel the policy.

How It Works

When you buy permanent insurance (like whole life), part of your payment goes toward a savings component called cash value. If you miss payments and the policy lapses, or if you choose to surrender (cancel) the policy, state laws and the policy contract prevent the insurer from keeping your built-up savings. Instead, you get to keep the value you built.

Common Nonforfeiture Options

You can usually choose from three or four main choices:

• Cash Surrender Value: You cancel the policy completely and receive the accumulated cash value as a lump sum (minus any fees or loans).
• Reduced Paid-Up Insurance: You stop paying new premiums. The insurer reduces the policy's total face (death benefit) amount, but the policy remains fully paid for life.
• Extended-Term Insurance: You use your cash value to buy a temporary term insurance policy. It keeps the exact same death benefit as your original policy, but it only lasts for a specific number of years based on how much your cash value can buy.
• Policy Loans: Some definitions include using the accumulated cash value to borrow against or cover unpaid premiums automatically.

A common example of a nonforfeiture option is the cash surrender value, where a person who stops paying life insurance premiums receives their accumulated cash value as a lump sum instead of losing everything.

Examples of Nonforfeiture Options

• Cash Surrender Value: Maria pays into her whole life insurance policy for 15 years. She can no longer afford the monthly payments and cancels the policy. Instead of losing all her built-up equity, she takes the accumulated cash value as a payout. The policy ends.
• Reduced Paid-Up Insurance: David pays on his policy for 20 years and wants to stop making payments. He uses his accumulated cash value to buy a smaller, fully paid-up permanent policy. He owes no more premiums, and his family gets a smaller death benefit when he dies.
• Extended Term Insurance: Sarah cannot pay her premiums after 10 years. She uses her cash value to convert her permanent policy into a temporary term life insurance policy. She keeps her original coverage amount for a limited number of years without paying any more fees.

Learn more about these choices through the Investopedia Nonforfeiture Guide.

The main disadvantage of a nonforfeiture option is that you sacrifice a portion of your policy’s original value, benefits, or future growth when you stop paying premiums.

Key Disadvantages

• Reduced Benefits: If you choose a reduced paid-up or extended-term option, you often get a lower death benefit or temporary coverage instead of your original permanent policy value.
• No Cash Value Growth: Selecting options like reduced paid-up or extended-term insurance stops any further cash value accumulation inside the policy.
• Temporary Coverage Expiration: Extended term insurance only lasts for a limited period determined by your remaining cash value, meaning the coverage will eventually expire.
• Tax Consequences: Taking a cash surrender value as a lump sum can trigger unexpected income taxes if the payout exceeds the total premiums you paid into the policy.
• Surrender Fees: Cashing out early in the life of the policy often incurs high surrender charges and fees, reducing the actual payout you receive.

A nonforfeiture option in long-term care insurance ensures that you keep partial benefits if you stop paying premiums and your policy lapses.

How It Works

• Protection from Total Loss: If you cancel your policy or miss payments after a set number of years (usually three or more), you do not lose all the money you paid in.
• Paid-Up Status: The policy converts to a paid-up status, meaning no further premium payments are required.
• Added Cost: This is often sold as an optional rider that typically adds a small percentage (around 5%) to your initial premium cost.

Common Types of Nonforfeiture Options

• Shortened Benefit Period: The most common option. It keeps your original daily benefit amount, but shortens the total duration or lifetime maximum pool of money available for your care (often equal to the total amount of premiums you paid).
• Reduced Paid-Up Benefit: This option keeps the coverage active for the original duration, but reduces the daily or monthly dollar amount the policy will pay out for your long-term care.
• Contingent Nonforfeiture: A special, built-in safety feature required on qualified policies. It triggers automatically if the insurance company enacts a massive, unaffordable rate hike, allowing you to safely drop the policy while retaining a reduced, paid-up benefit. You can learn more about these rules through state resources like the Texas Department of Insurance Regulations.

Cash value life insurance policies require a nonforfeiture provision.

Eligible Policies

• Permanent policies: Whole life and universal life policies that build up cash value.
• Exclusions: Temporary term policies do not build cash value, so they do not offer nonforfeiture options.

Standard Nonforfeiture Options

• Cash Surrender Value: The policy is canceled, and the insurer pays out the accumulated cash value as a lump sum.
• Reduced Paid-Up: The cash value is used to buy a smaller, fully paid-up permanent policy with no future premiums required.
• Extended Term: The cash value is used to buy a term policy with the same face amount as the original policy for a limited duration.