when the owner of a whole life insurance policy surrenders the policy they have several nonforfeiture options the insurance company guarantees a minimum cash value for the insurance policy after a specific period typically three years from when the policy starts 1
for traditional whole life policies the owner decides which of four ways see below they would like to access the policy s cash value there are no guarantees for the minimum amount of life insurance available in variable and universal life policies which allow for variable investing also the amount of reduced paid up or extended term insurance may decrease if a policy s sub account performance is poor or credited interest rates are low life insurance policyholders can select one of four nonforfeiture benefit options cash surrender value extended term insurance loan value and paid up insurance in permanent life insurance policies if you fail to pay the premiums in the grace period you won t lose your life insurance instead you can access your accumulated cash value with the following options if the policyholder does not make a selection the terms of the policy will generally stipulate which option would go into effect if the policy lapses or is surrendered payout options under a nonforfeiture clauseafter surrendering a whole life insurance policy the death benefit on that policy no longer exists before issuing payment to the policy owner outstanding loan amounts are satisfied with the cash value some companies offer an annuity option in the nonforfeiture clause the remaining cash value may be used to purchase an annuity free of commissions or expenses annuities pay regular payments as outlined in the contract with the cash surrender value option the policy owner terminates the policy and receives the remaining cash value within six months cash surrender value applies to the savings element of whole life insurance policies payable before death however during the early years of a whole life insurance policy the savings portion brings little return compared to the premiums paid 2cash surrender value is the accumulated portion of a permanent life insurance policy s cash value that is available to the policyholder upon surrender of the policy depending on the age of the policy the cash surrender value could be less than the actual cash value in the early years of a policy life insurance companies can deduct fees upon cash surrender with the paid up policy option you can use your cash surrender value to buy a paid up version of the same type of life insurance policy so you would no longer have to make premium payments however surrendering a portion of the cash value reduces the death benefit the policy would retain a cash value component but it would grow at a reduced rate choosing the nonforfeiture extended term option allows the policy owner to use the cash value to purchase a term insurance policy with a death benefit equal to that of the original whole life policy the policy is calculated from the insured s attained age the term policy ends after a fixed number of years as detailed in the policy s nonforfeiture table for some companies this option may be automatic when surrendering a whole life insurance policy extended term insurance allows a policyholder to stop paying the premiums but not forfeit the equity of their policy the amount of cash value you will have built in your policy will be reduced by the amount of any loans against your life insurance 3extended term insurance is often the default nonforfeiture option with extended term insurance the face amount of the policy stays the same but it is flipped to an extended term insurance policy meanwhile the equity you built is used to purchase a term policy that equals the number of years you paid premiums for example if you purchased a policy when you were 20 years old and you paid until age 55 you would receive a term policy that is less than 35 years or if you were 35 when you purchased your policy and you paid until you were 45 you would receive a term policy less than 10 years unlike conventional loans policy loans don t necessarily need to be paid back however any money you take out will be deducted from the death benefit that goes to your beneficiaries just like with a conventional loan you ll be charged interest that could range from 5 to 9 on the loan unpaid interest will be added to your loan amount and will be subject to compounding 4