Which Nonforfeiture Option Provides the Highest Amount of Protection?

When a permanent life insurance policy lapses due to nonpayment of premiums, policyholders have certain options under the nonforfeiture clause to still receive some value from the policy. But which option provides the highest amount of continued life insurance protection?

The nonforfeiture option that provides the highest level of continued insurance coverage is the extended term insurance option.

Here’s an overview of how extended term works and why it offers the greatest amount of continued protection compared to other nonforfeiture options:

What is Extended Term Insurance?

With extended term insurance, the policyholder uses the accumulated cash value from their lapsed permanent life insurance policy to purchase a term insurance policy.

The death benefit on the new term policy is equal to the death benefit amount on the original permanent life insurance policy.

However, the term of coverage is limited based on the amount of cash value available and the insured’s attained age. The coverage extends for a set number of years according to the nonforfeiture table in the policy.

Why Extended Term Offers the Most Protection

Of the four main nonforfeiture options, extended term is the only one that preserves the full death benefit amount:

• Extended term – Full original death benefit for limited time period
• Reduced paid-up – Permanent coverage but reduced death benefit
• Cash surrender – No death benefit, only return of cash value
• Automatic premium loan – Coverage continues but cash value is reduced

With extended term, the death benefit stays the same rather than being reduced like with reduced paid-up insurance. The key tradeoff is that extended term only provides temporary coverage for a set period, rather than lifelong coverage.

But in terms of maintaining the highest death benefit, extended term is the optimal choice if continued life insurance protection is the top priority.

Examples of Extended Term

Here are some examples to illustrate how extended term insurance works:

• Alan, 65, lapses his $500,000 whole life policy after paying premiums for 10 years. The cash value is $50,000. With extended term, Alan uses the $50,000 to purchase a $500,000 term policy until age 75 based on the nonforfeiture table.

• Jen, 45, lapses her $250,000 whole life policy after paying premiums for 5 years. The cash value is $15,000. With extended term, Jen uses the $15,000 to purchase a $250,000 term policy until age 50.

• Frank, 55, lapses his $1 million policy after paying premiums for 20 years. The cash value is $100,000. With extended term, Frank uses the $100,000 to purchase a $1 million term policy until age 65.

In each case, extended term allows the highest possible death benefit to continue based on the available cash value. The key tradeoff is having temporary rather than permanent coverage.

Considerations of Extended Term

Some other things to keep in mind with extended term insurance:

• Payout term lengths vary by age and cash value amount
• Premiums and policy fees won’t be deducted during extended term period
• Some policies require selecting extended term option upon lapse
• If extended term ends before death, coverage ceases completely

Overall, extended term offers a way to maintain the highest possible level of death benefit after lapsing a permanent life insurance policy, using the available cash value to maximum effect. It provides valuable temporary protection, especially for younger policyholders.