What is a Nonforfeiture Clause? Everything You Need to Know

A nonforfeiture clause is a contractual provision found in certain insurance policies, primarily life insurance and long-term care insurance. It protects the policyholder by ensuring they receive some benefit even if they stop paying premiums before the policy matures or expires.

In this guide, you'll learn:

How nonforfeiture clauses work
Different types of nonforfeiture options
Which insurance policies typically have nonforfeiture clauses
How to choose the best nonforfeiture option for your needs

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John Ramsey

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Updated on

July 11, 2024

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Glossary

Nonforfeiture

How Does a Nonforfeiture Clause Work?

When a policyholder stops paying premiums, the nonforfeiture clause prevents them from losing all the value accumulated in the policy. Instead, the clause provides several options for the policyholder to utilize the policy's cash value (the accumulated savings component of certain life insurance policies).

What are the Different Types of Nonforfeiture Options?

There are three main types of nonforfeiture options:

Cash Surrender Value: The policyholder receives a lump sum payment equal to the policy's cash value, minus any surrender charges. However, this option terminates the policy and eliminates the death benefit.
Reduced Paid-Up Insurance: The cash value is used to purchase a new, smaller life insurance policy with the same type of coverage. This new policy has a reduced death benefit but requires no further premium payments.
Extended Term Insurance: The cash value is used to purchase a term life insurance policy with the same death benefit as the original policy. This option provides coverage for a specific term (period), determined by the amount of cash value available.

Which Insurance Policies Typically Have Nonforfeiture Clauses?

Nonforfeiture clauses are most commonly found in permanent life insurance policies, such as whole life and universal life. Some long-term care insurance policies may also include nonforfeiture provisions.

How Do I Choose the Best Nonforfeiture Option?

The best option depends on your individual circumstances and financial goals. Consider factors such as your need for immediate cash, desire for continued insurance coverage, and age. Consulting with a financial advisor or insurance professional can help you make an informed decision.

If seeking a licensed professional, consider our services. Our insurance advisors and client support team are here to assist you with your insurance needs.

Conclusion

This guide has offered a comprehensive overview of nonforfeiture clauses. For those seeking to deepen their understanding, we recommend exploring our guide on life insurance, which dives into the different types of life insurance policies and their features in greater depth.

Nonforfeiture FAQ

What does the nonforfeiture provision mean?

A nonforfeiture provision in an insurance policy ensures that the policyholder won't lose all benefits if they can't continue paying premiums. It offers different options to use the accumulated value of the policy.

Does every insurance policy have a nonforfeiture clause?

No, not all insurance policies have a nonforfeiture clause. It's most commonly found in permanent life insurance policies and some long-term care insurance policies.

When does a nonforfeiture clause come into play?

A nonforfeiture clause becomes active when a policyholder stops paying premiums on a policy that has accumulated cash value. The clause offers choices on how to use that value.

How does a nonforfeiture clause work in long-term care insurance?

In long-term care insurance, a nonforfeiture clause typically allows policyholders to receive a reduced amount of benefits or a shortened benefit period if they stop paying premiums, based on the amount they have already paid.