California Life-Only & Accident and Health AgentLife InsuranceMedium
An insured individual has a $250,000 whole life insurance policy with a cash value of $30,000. They decide they no longer wish to pay premiums but want to maintain some form of life insurance coverage for the longest possible period, albeit at a reduced face amount. Which nonforfeiture option should they choose?
- AReduced Paid-Up Insurance
- BAutomatic Premium Loan
- CExtended Term Insurance
- DCash Surrender Value
Show answer & explanationAnswer & explanation
Correct answer: A. Reduced Paid-Up Insurance
The Reduced Paid-Up Insurance nonforfeiture option uses the policy's cash value as a single premium to purchase a new, fully paid-up policy with a lower face amount. This new policy provides coverage for the entire remaining lifetime of the insured, which aligns with the desire for coverage for the 'longest possible period'.
Why the other options are wrong
- B. Automatic Premium Loan uses cash value to pay premiums, but the client wants to stop paying premiums, and this option would eventually exhaust the cash value and terminate the policy if not repaid.
- C. Extended Term Insurance provides the original face amount for a limited period, not the 'longest possible period'.
- D. Cash Surrender Value terminates the policy and coverage, which is contrary to the client's goal of maintaining coverage.
Reduced Paid-Up Insurance
A nonforfeiture option where the policy's cash value is used as a single premium to purchase a new, fully paid-up policy with a lower face amount.
- Coverage remains in force for the insured's lifetime.
- Face amount is reduced from the original policy.
- No further premium payments are required.
Memory trick: Cash, Term, or Reduced: choices when premiums are refused.