Understanding Non-Forfeiture Options: Protecting Your Life Insurance Investment

Not being able to pay your life insurance premiums after you have paid them for several years is surely a tough moment. Where on one side you can’t pay further premiums, but you also don’t want to lose out on all the benefits and your premium investments. 

Well, this is where non-forfeiture options come into play! 

What are they? Non-forfeiture options (NFO) in life insurance are clauses or provisions that help policyholders get some of the coverage benefits even when they are not able to pay the policy premiums. This way, policyholders do not miss out on all the benefits of their life insurance policy!

Curious to know more? Read on to this blog to understand the importance of non-forfeiture options, various non-forfeiture options available, how they work, and much more!

Importance of Non-Forfeiture Options in Life Insurance

The non-forfeiture clause in life insurance secures some of the policyholder’s investments even if they aren’t able to pay the premiums. This way, their hard-earned money does not go in vain. 

A situation of policy lapse can be quite overwhelming for the policyholder as they might lose all their benefits and premium investments. 

For example, Vijay, 35, has been paying premiums regularly for the last five years of his life insurance policy. However, in the 6th year, he is not able to pay the policy premiums due to unfortunate job loss. 

In this case, without a non-forfeiture option, Vijay will lose all the benefits of his policy as well as the investments he has been making for the last five years. 

However, the non-forfeiture options will protect him by making sure he doesn’t lose all the benefits of their policy. With the Non-forfeiture options, he will have multiple ways to surrender his policy without losing all the associated benefits. Hence, it provides Vijay and his family great flexibility and peace of mind. 

How Non-Forfeiture Options Work

We have already mentioned that non-forfeit options allow policyholders to not walk out empty-handed. These options make sure that the policyholder gets some of the benefits covered by the life insurance policy. But let us thoroughly understand how it works – 

Generally, life insurance companies are bound to pay a minimum cash value after a specific period of premiums being paid, generally three years. Therefore, do not make the mistake of losing all your investments without choosing one of the non-forfeiture options. 

Types of Non-Forfeiture Options

Here are four major non-forfeiture options that you must consider —

1. Cash Surrender Value

This option allows you to surrender your existing life insurance policy and get surrender value as a benefit. It is typically equal to 30% of the total premium payments made, excluding the 1st year. 

Example:

Let’s say you have a life insurance policy of 15 lakh, and you have been paying premiums for a few years now. However, due to some unfortunate reasons, you are no longer in a financial position to pay premiums. 

In this case, one might think of terminating their life insurance policy, leaving all the policy benefits behind. However, one great option is to surrender the existing life insurance policy and get a cash surrender value. 

Assume your cash surrender value is ₹50,000. In this case, you will get at least ₹50,000 (excluding surrender or any other charges.) as a benefit. 

2.  Reduced Paid-up Insurance

Reduced Paid-Up Insurance is a Non-Forfeiture option in life insurance that allows you to keep your policy active without paying any more premiums. So, your policy will become reduced paid-up. But here’s the catch! This plan will not have benefits (death or maturity) similar to those of the original policy. 

Example: 

You have a life insurance policy with a maturity benefit of ₹10 lakhs, and it has built up a cash value of ₹2 lakhs over the years. Now, you are unable to pay the premiums, so you have chosen the Reduced Paid-Up Insurance option. In such a scenario, the insurer will decide the reduced maturity benefit on several factors like the premiums paid, insured’s age, and more. 

3. Extended-Term Insurance

With this non-forfeiture option, policyholders can buy a new term life insurance policy from the money collected from the existing policy that they want to forfeit. Consequently, it serves as a temporary coverage and policyholders don't have to pay any additional premiums for a specific period. 

Example:

Let’s say you have a term life insurance policy with a sum assured of ₹10 lakh. It has accumulated a cash value of ₹4 lakh. 

Now, if you choose the extended-term insurance option, the insurer can use the cash value of the existing life insurance policy to buy a new term life insurance policy with a sum assured of 10 lakh. The new term insurance will have the same death benefit as your original policy but will only last for a specific time (like 10, 20, or 30 years).

Factors to Consider When Choosing a Non-Forfeiture Option

Choosing a non-forfeit option may be a complex task as you might end up being confused about which option is the best for your financial needs. Here are a few crucial factors that you must consider when choosing a non-forfeit option –

Financial Needs: GIve a proper thought to your financial situation and decide what you might need the best. For example, if you think continued protection for your family is still the priority, a reduced paid-up insurance option might be a great choice for you. However, if you are in need of lump sum money, surrendering your policy and walking out with cash surrender value is a better option. 

Time Horizon: Understand the time horizon for your financial needs. Let’s say you need funds in the near future, surrendering your policy is an ideal option. However, if you have a long-term financial goal, choosing reduced paid-up insurance or extended-term insurance could be more advantageous.

Premium Costs: Not being able to pay the premiums is the root cause. Therefore, make sure you properly compare the premium costs associated with each non-forfeiting option. For instance, reduced paid-up insurance has lower premiums as compared to extended-term insurance. 

Policy Terms: Thoroughly review and understand the terms and conditions of each non-forfeiting option. Analyse various components such as minimum cash value requirements, waiting periods, etc.

Tax Implications: There will be tax implications imposed on each non-forfeiting option. Therefore, do not forget to evaluate that part. Cash surrender values are generally subjected to income tax. On the other hand, reduced paid-up insurance and extended-term insurance have some favourable tax treatment. 

Comparison of Non-Forfeiture Options

Conclusion

There you have it – A complete guide helping you understand the ins and outs of non-forfeiture options in life insurance policy. We certainly hope that this guide will significantly help you choose the right non-forfeiting option for you and your family.

Remember, it is highly advised to consult an experienced life insurance professional before you make up your mind as they’ll be able to explain to you all the other key aspects of forfeiting your life insurance policy. 

Frequently Asked Questions

Q1. How is the surrender value calculated if I decide to surrender my life insurance policy?

Ans - Surrendering your life insurance policy is a great option if you are not able to pay premiums and want to walk out with some lump sum cash amount. Your surrender value will typically equal 30% of the total premium payments made excluding the 1st year. 

Q2. What are the major non-forfeiting options available in the Indian life insurance market? 

Ans - Here are four major non-forfeiture options that you must consider —

• Cash Surrender Value 
• Paid-Up Insurance
• Extended-Term Insurance 
• Automatic Premium Loan 

Q3. Which nonforfeiture option is best for me if I want favourable tax implications on my life insurance policy benefits? 

Ans - If you don’t want any heavy tax implications on your life insurance policy benefits, reduced paid-up insurance and extended-term insurance are good options. Cash surrender value, on the other hand, is generally subjected to income tax.

Q4. Which option is better - reduced paid-up insurance or extended term insurance if I seek lower premiums? 

Ans - Generally, reduced paid-up insurance has lower premiums as compared to extended-term insurance. 

Q5. What are the factors to consider when choosing a non-forfeiture option?

Ans - Here are a few crucial factors that you must consider when choosing a non-forfeit option – Financial Needs, Time Horizon, Premium Costs , Policy Terms, Tax Implications