A nonforfeiture clause is a provision in an insurance policy that guarantees the insured will receive some benefit, even if they cancel their policy or cannot pay their premiums. This clause can be helpful if the policyholder experiences financial difficulties and can no longer afford to pay their premiums. Some insurance policies that may have nonforfeiture clauses include disability insurance policies, permanent life insurance policies and some long-term care insurance policies.

The clause can be beneficial to policyholders, as it ensures they will not lose all of their investment if they fail to pay for their policy or have to cancel for another reason.

Common Terms in Nonforfeiture Clauses

When learning about nonforfeiture clauses, there are some common terms to be aware of, including cash surrender value and extended-term insurance.

Cash Surrender Value

A nonforfeiture clause might mention something called cash surrender value. The cash surrender value typically means that a policyholder will receive the remaining cash value of their permanent life insurance policy if they cancel it.

The cash value is the amount of money the policyholder has paid into the policy, minus any fees or charges. Keep in mind, though, that the age of the policy will determine the cash value. Newer policies will not have as high of a cash surrender value as policies held for long periods.

Extended-Term Insurance

Another term to know within a nonforfeiture clause is extended-term insurance. Choosing the nonforfeiture extended-term plan allows a consumer to use the cash value to purchase a term insurance policy instead. In this instance, the new policy's death benefit will typically be equal to that of the original whole-life policy.

Does Your Insurance Policy Offer a Nonforfeiture Clause?

Most life insurance policies will have a nonforfeiture clause automatically included. However, it's always best to check with your insurer before purchasing a plan. You can find out if your policy has this clause by reading the fine print or contacting your insurer directly.

If your policy does have a nonforfeiture clause, it will typically state that you are entitled to a certain percentage of the death benefit if you cancel your policy or are unable to pay. Your policy will also outline what happens to your coverage if you cannot pay your premiums.

While a nonforfeiture clause is not required by law, most insurers include them in their policies to give customers peace of mind. Therefore, if you are considering canceling your life insurance policy, it's essential to know whether or not your insurer offers a nonforfeiture clause. This way, you can make an informed decision about what is best for you and your family.