Insurance

non-confiscation clause

What is a non-forfeitable clause?

A non-confiscation (sometimes hyphenated) clause is an insurance policy clause that states that the insured can receive all or part of the benefit or a partial refund of the premium if it lapses due to non-payment. Standard life insurance and long-term care insurance may have non-forfeiture clauses. The clause may involve a refund of a portion of the total premiums paid, the policy’s cash surrender value or a reduced benefit based on premiums paid before the policy lapses.

key takeaways

  • A non-confiscation clause is an insurance policy clause that provides for full or partial payment or partial refund of premiums if the insured lapses due to non-payment.
  • Permanent life, long-term disability, and long-term care insurance policies may have non-forfeiture clauses.
  • With a traditional whole life policy, the owner decides which of four ways they want to capture the cash value of the policy.

How the non-confiscation clause works

The non-forfeiture option is available when the owner of a whole life insurance policy chooses to surrender. Insurance companies guarantee a minimum cash value of the policy after a specific period, usually three years from the effective date.

With a traditional whole life policy, the owner decides which of four ways (see below) they want to capture the cash value of the policy. Variable and universal life insurance policies do not guarantee a minimum coverage amount and allow variable investments. In addition, the reduced paid or deferred insurance amount may be reduced if the sub-account of the policy is underperforming or has a lower credit rate.

Life insurance policyholders can choose one of four non-forfeiture benefit options: cash surrender value, extended term coverage, loan value, and fully paid coverage.

In a whole life insurance policy, if you fail to pay your premiums within the grace period, you will not lose your life insurance; your accumulated cash value will save you with the following options:

  1. You can terminate the policy and receive a cash surrender value.
  2. You can reduce your coverage for the remainder of your policy without future premiums. (i.e. fully paid policy).
  3. You can use the accumulated cash value to pay future premiums (also called an automatic premium loan).
  4. You can use the remaining cash surrender value to purchase a long-term policy. (No additional premium required).

If the policyholder does not make a choice, the terms of the policy usually dictate which option will come into effect in the event of a lapse or surrender of the policy.

Payment options under non-forfeitable clauses

After you abandon your whole life insurance policy, the death benefit no longer exists. The outstanding loan amount meets the cash value before payment to the policyholder.

Some companies also offer annuity options in non-forfeiture clauses. The remaining cash value can be used to purchase commission- or fee-free annuities. An annuity pays periodic payments as specified in the contract.

Cash Surrender Value

Here, the policyholder receives the remaining cash value within six months under the non-confiscation cash payment option. The cash surrender value applies to the savings portion of a whole life insurance policy paid before death. However, in the early days of a whole life insurance policy, the return on the savings component is very small compared to the premiums paid.

Cash Surrender Value is the cumulative portion of the cash value of a permanent life insurance policy that the policyholder will receive at the time of surrender.

Depending on the age of the policy, the cash surrender value may be lower than the actual cash value. In the early days of a policy, life insurance companies can deduct expenses on cash surrenders. Depending on the policy type, the policyholder may use the cash value throughout their lifetime. It’s important to note that surrendering part of the cash value reduces the death benefit.

long term insurance

Selecting the non-confiscation extended term option allows the policyholder to use the cash value to purchase a term policy with a death benefit equal to the original whole life policy. The policy is calculated based on the actual age of the insured. A term policy ends after a fixed number of years as detailed in the policy’s non-forfeiture form. For some companies, this option may be automatic when abandoning a whole life insurance policy.

Long-term insurance allows policyholders to stop paying premiums without losing the entitlement to their policy. The amount of cash value you will have in your policy will be less any loan amount against that policy.

Long-term coverage is usually the default non-forfeiture option. For deferred insurance, the denomination of the policy remains the same, but it is rolled over to an deferred insurance policy. At the same time, the assets you build up are used to buy term policies equal to the number of years you pay your premiums.

For example, if you buy a policy at age 20 and you pay it back before age 55, you will receive a term policy of less than 35 years. Alternatively, if you are over 35 years old when you purchase the policy and you make your repayments before age 45, you will receive a term policy of less than 10 years.

Loan Value of Policy Loans

Unlike traditional loans, policy loans do not need to be repaid. Any money you take out will simply be deducted from your beneficiary’s death benefit. However, just like a traditional loan, you pay 5% to 9% interest on the loan. Unpaid interest will be added to your loan amount and will be subject to compounding.

special attention items

The Reduced Paid Insurance option allows policyholders to receive a lower amount of fully paid whole life insurance, excluding commissions and fees. The age of the insured will determine the face value of the new policy. Therefore, the death benefit is less than the benefit of the lapsed policy.

Policyholders have the option to transfer the cash value of their whole life policy into paid coverage. In this case, the policy does not necessarily pay according to the strict definition of the term, but it is able to pay the premium on its own.

Depending on the type and performance of the policy, the policyholder may need to resume paying premiums in the future, or may reach the point where the premiums are covered for the remainder of the policy.

Why do non-confiscation clauses exist?

These provisions provide consumer protection if policyholders stop paying premiums. Sometimes policies expire after a so-called grace period. What if there is cash accumulated in the policy? In this case, state law prohibits the company from retaining cash and canceling the policy.

What is the cash surrender value?

Cash Surrender Value applies to the savings portion of a whole life insurance policy. This value should be paid before death. Overall, this is the cumulative portion of the cash value of the permanent life insurance policy that policyholders receive upon surrender.

Depending on the age of the policy, the cash surrender value may be lower than the actual cash value.

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