Wednesday, January 17, 2007

Whole Life Insurance - Nonforfeiture Options

If you own a Whole Life policy for awhile now, you may be wondering on how to recover your cash value. Before I go on, please note that nonforfeiture really means "surrender" value.

In one point of time in the life insurance industry, if you did not pay your premiums and fail to pay it by the end of the grace period, your policy will lapse and you would forfeit any equity held in the policy. In response to this problem, many life insurance companies adopted the nonforfeiture option, which means you are allowed to stop paying premiums and not forfeit any of the equity in the policy. In simple terms, you have three options on how you want to surrender your policy. The amount of cash value will be reduced by any loans you have taken out of it, whether directly or indirectly. What I mean by directly is that you made a call to the insurance company that you want to borrow the cash value for whatever reasons. By indirectly, you did not pay your premiums, so the insurance company used your cash value to keep the policy active.

These are three different nonforfeiture options you can take:

1) Cash. Simply put, you surrender the policy and take the cash value. If you choose this option, you will not be able to reinstate your policy.

2) Reduced Paid-Up Insurance. This is where you give up the current face value of your policy and use your cash value to purchase a lower face amount. Your policy may be reinstated to original policy within the given time frame that is stated in the original policy (typically 3-5 years).

3) Extended Term Insurance. This is the default option if you do not choose a nonforfeiture option. This is where the face amount in your policy remains the same, but you use your equity to purchase a term policy. The length of this term is equal to number of years you have paid your premiums. For example, if you purchase a policy at age 30 and stop paying at age 50, your policy will last under 20 years and 350 days. You may reinstate the original policy within a given time frame. This option is usually not available in rated policies, meaning your health, habits, or occupation is deemed high risk.