# Nonforfeiture Clauses in Insurance: Top 4 Payout Options Explained

## What Is a Nonforfeiture Clause?

A nonforfeiture clause is a feature in insurance policies that protects policyholders by allowing them to keep some benefits or recover part of their premiums if the policy lapses. It’s especially common in life insurance, such as whole life and long-term care policies. Policyholders usually have four payout options: taking the cash surrender value, converting to paid-up insurance, choosing extended-term insurance, or borrowing against the policy through a loan. They give policyholders flexibility, allowing them to choose what works for their financial situation.

### Key Takeaways

*   Nonforfeiture clauses let policyholders retain benefits or premiums, protecting against total loss if a policy lapses.  
    
*   Cash surrender, extended-term insurance, paid-up policies, and policy loans are primary nonforfeiture options.  
    
*   Upon policy surrender, outstanding loans are deducted from the cash value before payout.  
    
*   Extended-term insurance uses the policy's cash value to maintain a death benefit temporarily without further premiums.  
    
*   Policy loans offer access to funds without repayment obligations, but reduce the policy's death benefit for beneficiaries.

## Insights into Nonforfeiture Clauses in Insurance

When a whole life insurance policy is surrendered, several nonforfeiture options become available. The insurer guarantees a minimum cash value after a certain period, usually three years from the policy's start.

In traditional whole life policies, the policyholder can decide how to access the cash value. Variable and universal life policies allow variable investing but don't guarantee a minimum insurance amount. Reduced paid-up or extended-term insurance may decrease if sub-account performance is poor or interest rates are low.

> **Important**
>
> Policyholders can choose from four nonforfeiture options: cash surrender value, extended-term insurance, loan value, and paid-up insurance.

If you miss premium payments in the grace period, you won't lose your permanent life insurance. Instead, you can use your accumulated cash value in these ways:

1.  Terminate your policy and get the [cash surrender value](https://www.investopedia.com/terms/c/cashsurrendervalue.asp) in cash.
2.  Reduce your coverage for the remaining term of the policy and pay no future premiums. (i.e., paid-up policy).
3.  Buy an extended-term insurance policy with the remaining cash surrender value (no further premiums required).
4.  Use your accumulated cash value to pay the future premiums (also referred to as an [automatic premium loan](https://www.investopedia.com/terms/a/automatic-premium-loan.asp)).

If the policyholder doesn't choose an option, the policy's terms usually dictate which option applies if the policy lapses or is surrendered.

## Navigating Nonforfeiture Clause Payout Options

Once a whole life insurance policy is surrendered, its death benefit ends. Before issuing payment to the policy owner, outstanding loan amounts are satisfied with the cash value.

> **Fast Fact**
>
> Some companies allow using the remaining cash value to buy an annuity without commissions or fees. Annuities provide regular payments according to the contract.

### Demystifying Cash Surrender Value in Insurance

With the cash surrender value option, the policy owner terminates the policy and receives the remaining cash value within six months. Cash surrender value relates to the savings component of whole life insurance, payable before death. In the policy's early years, this savings portion offers limited returns compared to premiums paid.

Cash surrender value is the accumulated part of a policy's cash value available to the holder upon surrender.

The cash surrender value could be less than the actual cash value, especially in a policy's early years when insurers may deduct fees.

### Understanding Paid-Up Insurance Options

The paid-up policy option lets you use the cash surrender value to buy a similar policy type without further premium payments.

However, surrendering a portion of the cash value reduces the [death benefit](https://www.investopedia.com/terms/d/deathbenefit.asp). The policy would retain a cash value component, but it would grow at a reduced rate.  

### Analyzing Extended-Term Insurance Nonforfeiture

Choosing the nonforfeiture extended-term option allows the policy owner to use the cash value to purchase a term insurance policy with a death benefit equal to that of the original whole life policy. The policy is calculated from the insured’s attained age. The term policy ends after a fixed number of years, as detailed in the policy’s nonforfeiture table. For some companies, this option may be automatic when surrendering a whole life insurance policy.

Extended-term insurance lets policyholders stop paying premiums without losing their policy's equity. The amount of cash value you will have built-in your policy will be reduced by the amount of any [loans against your life insurance](https://www.investopedia.com/articles/personal-finance/121914/understanding-life-insurance-loans.asp).

> **Fast Fact**
>
> Extended-term insurance is often the default nonforfeiture option. With extended-term insurance, the face amount of the policy stays the same, but it is flipped to an extended-term insurance policy. Meanwhile, the equity you built is used to purchase a term policy that equals the number of years you paid premiums.

For example, if you purchased a policy when you were 20 years old and you paid until age 55, you would receive a term policy that is less than 35 years. Or if you were 35 when you purchased your policy and you paid until you were 45, you would receive a term policy less than 10 years.

### Comprehending Policy Loans in Nonforfeiture Clauses

Policy loans, unlike conventional loans, don't need mandatory repayment. However, any money you take out will be deducted from the death benefit that goes to your beneficiaries.

Just like with a conventional loan, you’ll be charged [interest](https://www.investopedia.com/terms/i/interest.asp) that could range from 5% to 9% on the loan. Unpaid interest will be added to your loan amount and will be subject to [compounding](https://www.investopedia.com/terms/c/compoundinterest.asp).  

## Why Do Nonforfeiture Clauses Exist?

Nonforfeiture clauses offer protection in the event that a policyholder stops paying their premium. Sometimes, a policy expires after a so-called grace period. If cash has accumulated in the policy, state law forbids companies from keeping it and canceling the policy.

## What Is an Extended-Term Option?

With the extended-term option, you can choose to use the cash value in a whole life insurance policy to term insurance, allowing you to stop paying premiums. The death benefit would be equal to the benefit in the original whole life insurance policy.

## What Is Cash Surrender Value?

Cash surrender value applies to the savings element of whole life insurance policies. This value is payable before death.

Overall, it’s the accumulated portion of a permanent life insurance policy’s cash value that is available to the policyholder upon surrender of the policy. Depending on the age of the policy, the cash surrender value could be less than the actual cash value.

## The Bottom Line

A nonforfeiture clause protects policyholders from losing all of their benefits if an insurance policy lapses due to missed payments. It offers four main options: cash surrender value, extended-term insurance, paid-up insurance, and policy loans. These provide financial flexibility by allowing policyholders to use the policy’s cash value to maintain coverage or recover part of their premiums. The best option depends on each person’s financial situation and goals, so you should speak to a financial advisor to ensure you make the right decision for your long-term financial security.

> **Article Sources**
>
> 1.  American Income Life Insurance. “[What Are Life Insurance Non-Forfeiture Options?](https://www.ailife.com/articles/what-are-life-insurance-non-forfeiture-options.html)”
>     
> 2.  National Association of Insurance Commissioners. “[Standard Nonforfeiture Law for Life Insurance](https://content.naic.org/sites/default/files/inline-files/MDL-808.pdf).”
>     
> 3.  International Risk Management Institute. “[Extended Term Insurance](https://www.irmi.com/term/insurance-definitions/extended-term-insurance).”
>     
> 4.  MassMutual Blog. “[Is Life Insurance Taxable? FAQs You Need to Know](https://blog.massmutual.com/post/tax-life-insurance-faq).”