Nonforfeiture Options: Don't Just Let Your Policy Lapse

A lot of people get into a situation where they can't pay their life insurance premiums. Often, the solution is to ignore the premium notice. When you do that, your life insurance will lapse and it ends.

After that, you won't receive any more notices from the insurance company.

Problem solved.

Before you let that happen, it's a good idea to see if there are any other ways you can handle it.

One way, is by using a nonforfeiture option.

But what are nonforfeiture options anyway? I'm going to go over what they are below. After that, I'll go over a couple of other options to look at before the non-forfeiture options.

What are Nonforfeiture Options?

Nonforfeiture options are a feature of whole life insurance policies. These options allow you to stop paying premiums. You can then cash your policy in, buy a reduced paid up policy or buy extended term insurance.

Let's go into more details about these three options.

The Three Nonforfeiture Options

There are three nonforfeiture options available. Keep in mind that each option depends on the value of your policy. If you haven't had your policy very long, you won't have any cash value and no nonforfeiture options are available.

If you do have cash value, remember that it may be subject to a surrender charge. A surrender charge is a penalty for cancelling early. Any surrender charge comes out of the cash value in your policy. It's not something you have to pay out of your own pocket. If you have borrowed from the policy in the past, that would also reduce your cash value.

With that said, here are the three nonforfeiture options.

1. Cash surrender This is cashing your policy in. The insurance company will send you a check for the net cash value and then you can do whatever you want with the money. You'll use the cash surrender option if you need the cash.
2. Reduced paid up insurance You can use the cash value to purchase a whole life policy that is paid for. It will be less than the original face amount and since it is paid up, it won't require premiums. You'll just own that amount of life insurance from that point forward until you die.
3. Extended term insurance You can use the cash value to keep the original life insurance face amount but only for a specific term, or time period. How long the term is depends on the cash value of the policy. Once it's changed to extended term, you won't have to pay premiums anymore but you also won't build any more cash value. 

Nonforfeiture options are final with the exception of extended term insurance. If you elect extended term insurance, I believe it might be possible to reinstate the policy back to the original policy. Honestly, I am not sure if you can reinstate during the extended term insurance period. I have never had anyone ask.

Surprisingly, during my more than 25 years in life insurance, I have never seen anyone request paid up insurance or extended term insurance.

Everybody usually chooses just to cash surrender their policy if they don't decide to hang on to it.

Before you cash your policy in, keep reading for some other options to consider before you do.

Can't Pay Because You Are You Disabled? On Strike?

If you can't pay your premium because you are disabled, you might qualify for a waiver of premium benefit if you added that rider when you bought the policy.

I've also heard of waivers for if you go on strike. They are rare but do exist.

Either rider, if you qualify, would help you pay your premiums.

Check Your Policy Dividends

If you have had your policy for awhile, you might have accumulated some dividends you could use to pay your premium. Also check to see if your dividend is more than your annual premium. If so, you could change your policy's dividend option to reduce premium.

Not all whole life policies are participating so this may or may not be an option but it's worth checking into.

Take a Policy Loan to Pay Your Premium and Use Automatic Premium Loan

The next option is take out a policy loan to pay the premiums until you can start up again. Once you can start paying the premium again, you can pay off the loan.

Standard procedure for me on every whole life application I submit is to choose automatic premium loan. By doing this, it builds a layer of protection against the policy lapsing because a premium is overlooked. 

If a premium payment is missed, and the policy has a cash value, it will automatically trigger a policy loan and pay the premium. It will continue to do this for every premium missed as long as their is cash value. If there is no cash value, the policy will lapse.

I set it up this way because of unforseen circumstances. If you get sick and can't take care of your bills for whatever reason, it will keep your policy inforce as long as there is cash value. This will keep your policy inforce until you or a family member have a chance to take care of your bills.

While you don't necessarily have to pay the loan back, it's a good idea to do that if you can. It's certainly important to pay the interest. Otherwise, that interest could capitalize and that mean you'll pay interest not just on what you borrowed but also on the interest that you didn't pay.

This could erode the value of your policy.

Reduce the Face Amount of the Policy

Another option to explore is to reduce the face amount of the policy. If you reduced the face amount of the policy, the premium will also go down.

It's possible that you could make the policy more affordable and keep it inforce at a lower amount.

Don't Just Stop Paying Your Premium to Let Your Policy Lapse

If your intention is to cancel the policy, make sure you formally cancel it. This is especially true if you have cash value. Doing nothing means the cash value could just be eaten up by premiums.

Whether you have cash value or not, I always recommend filling out a cash surrender form if your intention to cancel it. This accomplishes to things. First it makes sure you don't waste your money. Second it lets the insurance company know what you want to do and then you don't waste their money sending you all these notices.

Believe it or not an astounding number of people just let their policies lapse.

Are Nonforfeiture Options the Same for Other Types of Life Insurance?

The above nonforfeiture options are for whole life policies. Since term life insurance has no cash value, there are no nonforfeiture options.

As far as universal life insurance policies, you can cash surrender the policy and switch it to extended term. The reduced paid up option is not available.

Conclusion

If you can't pay your life insurance premium, there are potentially three nonforfeiture options you can use. There are also a few other options you can potential use to hang on to your life insurance.

Have you ever used the nonforfeiture options? If so or if you have any questions, please let me know in the comments.