Which of the Following Nonforfeiture Options Should You Choose?

Choosing the right nonforfeiture option for your life insurance policy can significantly impact your financial planning. These options arise when you stop paying premiums, enabling you to retain some value from your policy. Understanding each choice’s implications is essential for making an informed decision.

We’ll explore three primary nonforfeiture options available to policyholders, highlighting their benefits and drawbacks.

Cash Surrender Option

The cash surrender option lets policyholders terminate their policy and receive the accumulated cash value, minus surrender charges or outstanding loans. This choice is ideal for those needing immediate funds to cover expenses or invest elsewhere. However, the cash value received may be subject to income tax if it exceeds the total premiums paid. As of 2024, the IRS taxes any amount above the cost basis as income, impacting your tax liability.

Surrender charges, particularly significant in the early years of the policy, typically decrease over time. Timing your surrender can influence the amount you receive. Additionally, surrendering the policy forfeits the death benefit, affecting your beneficiaries. Carefully weigh these factors against your immediate financial needs and long-term goals.

Reduced Paid-Up Insurance Option

The reduced paid-up insurance option allows policyholders to convert their policy into a smaller, fully paid-up policy using the accumulated cash value. While the death benefit is reduced, the policy remains active for the insured’s lifetime. This option is ideal for those wanting to eliminate premium payments while preserving some death benefit for their beneficiaries.

A key advantage is the absence of future premium payments, making it appealing for individuals on a fixed income or seeking to simplify financial obligations. The paid-up policy continues to build cash value, though at a slower pace, which can still be beneficial for maintaining some level of savings.

Extended Term Insurance Option

The extended term insurance option uses the accumulated cash value to purchase term insurance for the original policy’s face amount, maintaining coverage for a set period. This option is suitable for those prioritizing the death benefit over cash value growth.

It provides the original coverage amount temporarily, making it advantageous for individuals anticipating a short-term need for financial protection or expecting their beneficiaries to become self-sufficient. The length of coverage depends on the cash value and the insured’s age at conversion. Younger policyholders with substantial cash value may secure longer coverage, while older individuals might receive a shorter term.