Every permanent life insurance policy has what is referred to as nonforfeiture values. You buy a whole life insurance policy and you pay the premiums for a few years then something happens and you miss a payment or two.
You assume the policy is lapsed. Unfortunately, that is a word every life insurance buyer seems to know. Because the insurance agent is so afraid of that word he does not take the time to explain what the word lapse means.
Well, here goes, let us delve into how non-forfeiture values work.
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NonForfeiture Values – How They Work
You buy a term life insurance policy and you miss a couple of payments your policy is in a state of lapse. It is kaput, that is the end of it. Not so with a permanent life insurance policy.
Permanent life insurance policies have cash values and dividends which can, after a period of time, prevent your policy from going into a state of lapse.
There are certain non-forfeiture values which will come into play at that point. You don’t lose all, you don’t forfeit everything.
- Reduced Paid Up Insurance
You buy your whole life insurance policy with good intentions and you pay your premiums religiously for 7 years and you lose your job. The last thing you are thinking about is paying a life insurance premium. You want to get back to work fast, right? It takes you a few months before you get the kind of job you want to settle in.
You are back at work now and you ask yourself…I wonder what happened to that life insurance policy I had? The fact is that you can usually continue where you left off and make up the premiums you missed, little by little, over a chosen period of time. The nonforfeiture values had come into play.
What you should have done is to check with the company when you found you couldn’t pay. Many life insurance companies automatically choose the reduced paid up insurance option if you miss a payment.
This option states that you still have a policy but it is for a reduced amount. The cash values are the same as when you stopped paying and they still earn dividends and accumulate interest. Dividends, however, are not guaranteed.
- Extended Term Insurance
Another of the nonforfeiture values is the extended term option. Using the same scenario as above, you pay for years and stop. You can elect to maintain your full death benefit for a limited period of time and pay no more premiums.
In the policy contract you will see something like this. After 7 years the full amount of insurance will continue for an additional 12 years and 11 months. Of course if you want to start paying premiums again you may. This is another of the useful nonforfeiture values.
- Cash Values
At the same 7 year period you could choose to surrender your policy for it’s cash value. Although the cash may come in handy at that point this is not recommended.
Let us be practical, there is a reason why you bought the life insurance policy in the first place. That reason does not disappear because you lost your job.
The fact there now exists a greater need for life insurance if the debts keep piling up. Instead of surrendering the policy use the loan value. Take a loan from the policy which you can repay when you start working again. You repay without any pressure at all.
Well that is how nonforfeiture values work with your permanent life insurance policies.