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What are non-forfeiture benefits or non-forfeiture options?
These are benefits that you will not lose if you stop paying the premium on a cash-value life insurance policy. The dollar amount of these benefits varies depending on the size and type of the policy and how long you have had it. Three typical benefits include: - Receiving the policy’s cash surrender value in a lump sum.
- Using the lapsed policy to continue to provide death protection at the net rates for term insurance.
- Buying a paid-up term or cash-value policy for a reduced face amount using the cash surrender value of the policy.
Should I use cash-value life insurance plans?
Buy cash-value life insurance if you prefer to have a policy that protects you as long as you live. Some policies have higher premiums in the beginning and lower premiums in later years. Other types of cash-value life have premiums that are paid up in a fixed number of years or when you turn 65. Cash-value life insurance plans generally fall into five categories: traditional whole life, interest-sensitive whole life, universal life, variable life, and combination whole life/term life policies.If you want life insurance that also doubles as an investment vehicle, a cash-value life insurance policy may be for you. But if you simply want to insure your family against your own death at the lowest possible premium, you will save money by purchasing term insurance.Term insurance only covers you for the number of years specified in the policy, and it has no cash value. However, term insurance offers the largest immediate death benefit for your premium dollar.How does the extended term value provision in my cash-value life insurance policy work?
All cash-value life insurance policies include non-forfeiture options. The extended term value provision is one of those options. Say your cash-value policy has lapsed, and now you want to purchase a term-life policy. If you exercise your extended term value rights, you can continue the existing coverage amount as term insurance for as long a period of time as the cash value would purchase. What is the reduced paid-up value option in my cash-value life insurance policy?
This is one of the non-forfeiture options in your cash-value policy that allows you to use the cash value of your insurance to purchase a fully paid, lower benefit policy if you don’t want to keep making premium payments. Say your current policy would pay a $100,000 benefit upon your death. Rather than continuing to pay annual premiums, you could use the policy’s current cash value to purchase a fully paid policy with less coverage. The new policy might only pay $50,000 upon your death, but you would never have to make another premium payment. What is the purpose of my cash-value life insurance policy’s reinstatement right?
A reinstatement right gives you a window of time (grace period) after a policy has lapsed to reinstate the coverage by paying the past-due premiums and interest. For example, if your policy lapsed because you forgot to send in a payment while you were out of town, you could automatically reinstate your coverage by paying your premium, plus any penalties and interest charges. What is the surrender right provision in my cash-value life insurance policy?
All cash-value life insurance policies include a "surrender right," which entitles you to give the policy back to the insurer for its current cash value if you suddenly need cash, or if you don’t need your policy because you bought insurance elsewhere. If you surrender the policy, your current insurer cancels the insurance and sends you a check for its cash value. How can I find out how much cash value my insurance policy builds up every year?
Ask your agent or the insurer for an in-force policy illustration, sometimes called a point-in-time illustration, to compare with the projections you were given when you first purchased the policy. An in-force policy illustration shows a table with your guaranteed cash values, estimated cash values, cash surrender values, and death benefit for the remaining years of the policy. These figures tell you how well your estimated cash values or death benefits are doing compared to the original projections. If the values do not keep pace with the original projections, discuss with your insurance agent the reasons for the differences. Insurance companies send statements with this information each year on the anniversary of the policy. How do I access the cash value of my life insurance at retirement?
After you retire, there are several ways to turn the built-up cash value of your life insurance into cash, including:
- You can withdraw your basis free of tax. Your basis is the amount of premiums you paid, less any withdrawals you have made.
- You can take a policy loan. Loans are not generally taxable because they are an advance of the death benefit.
- You can combine both techniques. Often, a combination of withdrawing your basis down to zero and then borrowing the remainder gives the best results. If you let the policy lapse with the basis withdrawn and a full loan outstanding, you may face a significant tax bill.
Can I access the cash value of life insurance held in an irrevocable life insurance trust?
The cash value of a life insurance policy held within an irrevocable life insurance trust generally can’t be touched. But a family split-dollar arrangement can make the cash accessible by structuring the ownership of the life insurance policy so that the trust owns the insurance coverage and the trust maker’s spouse holds the investment component. What options do I have when terminating my cash-value life policy?
Most cash-value policies offer three non-forfeiture options if you want to terminate your policy before maturity: 1) you can receive the policy’s cash surrender value in a lump sum, 2) you can use the lapsed policy to continue to provide death protection at the net rates for term insurance, or 3) you can buy a paid-up term or cash-value policy for a reduced face amount using the cash surrender value of the policy. Return to Questions
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