What is non-forfeiture option in life insurance?

When you purchase life insurance, selecting a plan that is customized just to suit your need involves much more than deciding on a policy type or a death benefit amount. If you really want a custom plan that provides you with all of the security that you need, you need to dig deeper and compare various types of clauses or riders that can be written into the contract. This is why you need to decide if you want to select a very basic plan or build an actual custom plan that benefits you in more ways than one. Start comparing life insurance rates now by using our FREE tool above!

A basic individual life insurance policy is designed to pay out a stated sum of money to the named beneficiaries or estate when the named insured passes away while coverage is still active. A custom insurance policy can actually extend benefits to other family members or provide you with a myriad of different living benefits that are available from the carrier who underwrites the policy for an added cost. If you prefer that your policy goes beyond the basics, taking the time to build and tailor your plan is critical. One of the features that you can look for as you are building is the non-forfeiture clause. Read this guide to the non-forfeiture clause so that you know if it is something that you want written into your contract.

What does the non-forfeiture clause state?

The non-forfeiture clause is a special term that is written into both standard and specialty life plans that will protect the money that the policy owner has paid into the plan. The protection is offered by allowing the owner to receive all or a portion of the premiums paid over the life of the plan if the policy lapses for non-payment and certain conditions have been met. If premiums are returned, the clause will state that the insured or policy owner is entitled to a partial refund when payments due on a policy are not made by the time the grace period is up.

Some non-forfeiture clauses offer a different form of protection by allowing the owner to take advantage of a reduced death benefit based on the amount of the premiums that were paid up until the policy canceled. If enough of the premiums are paid, the clause may even state that you entitled to the entire benefit. This is why you must review the clause closely to see what the clause entails and what terms must be met before you can use the benefit to your advantage so that you do not have a false sense of security after missing a payment.

Common Clause Terms and Conditions

You cannot expect your policy, if it is customized with this clause, to automatically provide you with the entire death benefit when it was just recently put in effect. Instead of assuming that you have protection from the second that your policy takes effect, you should review the conditions that need to be met before you are entitled to a refund or to a portion of the benefit that you purchased. Here are some of the common conditions that you should look for as you peruse your contract:

• The policy must be continuously in force for a specified number of years without any lapses
• The clause may only be in effect for a limited amount of time or up to a stated age
• Entire death benefits may be paid if a stated percentage of total premiums are paid
• You may be entitled to only a portion of the premiums paid depending on age of policy
• Some non-payment Fees may be deducted from the refund or from the partial benefit
• Option to buy a new term policy matching the benefit of the original policy

Non-forfeiture State Laws

In some states, you do not even have to pay to have this added benefit on your life insurance plan because the clause is required by law. State legislatures in Arizona, California, Colorado, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Missouri, Montana, New Jersey, New Mexico, New York, Tennessee, Texas, Utah, Washington and West Virginia all have their own non-forfeiture laws. Some of these non-forfeiture laws are very protective in nature for consumers and some are extremely soft.

You should check with your state’s Department of insurance to see what types of laws are in effect, and be sure that you look closely at the laws and differentiate the laws for term insurance from the laws for permanent insurance.

Many states have much more strict laws for whole life insurance, which will give you the option to cash surrender, take the reduce paid-up insurance option, or convert the policy to an extended term. Review the time requirements, how long you have till past the due date, and how long the policy must have been paid before you assume that you do not need any riders or special clauses.

Who can benefit from a non-forfeiture clause?

Allowing your policy to lapse is not ideal and it should never be a choice, but this happens from time to time for a variety of different reasons. If you live in a state where there is no non-forfeiture requirement or where it does not apply to the term insurance plan that you plan on applying for, you might be interested to learn when selecting non-forfeiture insurance is a wise choice. Your plan may cost a small amount more with the clause, but the overall benefit may make the cost justified in your mind. Here are scenarios where the clause can help:

• You Want to Be Prepared for Financial Hardship

When someone suffers a financial hardship, one of the first financial products to go is life insurance. Consumers who own cars are required to keep car insurance and borrowers who are financing homes are required by their lender to carry home insurance, but no one is legally obligated to provide their family with financial protection. Instead of opting to cancel your life coverage when you simply cannot afford to keep it going, you will have the option to buy a paid-up plan or the option to get a refund of what you have paid. Either way, the benefit can help you.

• You Are Worried About Qualifying for Coverage in the Future

If you want to buy a standard life policy, you must pass an underwriting process where your health is assessed and your medical history is reviewed. For those who are older in age or who may have minor medical issues, the process can be exhausting. If you are not in excellent health or you are soon going to be a higher age bracket, qualifying for coverage just a few years down the line might be more difficult than you ever imagined. By having this clause written into your contract will ensure that even when you cannot afford coverage you will have a minimal amount to rely on.

• Avoid Losing All of the Money You Have Paid

If you are not planning for an economic disaster, another benefit of the clause is associated with losing your money. Many self-proclaimed economists are hesitant to buy term life insurance because they are betting against themselves. After all, this is the type of insurance that you will only really receive a benefit if you die while your term is active. If you miss just one payment on a 20-year term after you have held the policy for 15 years, you are missing out on thousands of dollars and have received no benefit for what you have paid. By having a non-forfeiture clause, you at least know that you can avoid losing money if you happen to overlook payment or if you really do hit troubled waters.

Other Riders and Clauses to Be Considered

The non-forfeiture clause is not the only clause that you can use to your advantage when you are buying life insurance. Some riders are designed to waive your premiums when you are critically ill or disabled, and others will give you access to a benefit so that you can live comfortably once diagnosed with an illness. There are also riders that will help you increase your death benefit without proving you are in good health. The riders to consider include:

• Waiver of premium
• Spousal accidental death benefit
• Disability income rider
• Guaranteed insurability rider
• Term conversion rider
• Critical illness rider
• Child protection rider
• Return of premium

Buying life insurance goes beyond just calculating how much cover you need and then comparing the premiums from carrier to carrier. You need to sit down and compare the riders that are going to really be useful in difficult times. Once you assess the options and price the cost, you can then comparison shop. The most effective way to compare premiums for fully custom life policies is to use a web-based quoting tool. Start comparing life insurance rates now by entering your zip code in our FREE tool below! Put your information in, select the insurance benefits and then make your final choice.