California Life-Only & Accident and Health AgentLife InsuranceMedium
A client purchased a $250,000 whole life insurance policy 15 years ago. The policy has accumulated $40,000 in cash value. Due to a change in financial circumstances, the client can no longer afford the premiums but wants to maintain some level of life insurance coverage without paying any further premiums. Which nonforfeiture option should the client choose?
- AAutomatic Premium Loan
- BExtended Term Option
- CReduced Paid-Up Option
- DCash Surrender Value
Show answer & explanationAnswer & explanation
Correct answer: C. Reduced Paid-Up Option
The Reduced Paid-Up option uses the policy's cash value as a single premium to purchase a new, smaller whole life policy that is fully paid for, providing permanent coverage without further premiums.
Why the other options are wrong
- A. Automatic Premium Loan uses the cash value to pay overdue premiums, which means the client would still be incurring a loan and not eliminating future premium payments.
- B. Extended Term Option would use the cash value to purchase a term policy for the original face amount for a limited time, which is not what the client wants (permanent coverage without further premiums).
- D. Cash Surrender Value would terminate the policy and pay out the cash value, ending all coverage.
Reduced Paid-Up Option
A nonforfeiture option where the policy's cash value is used as a single premium to purchase a new, smaller, fully paid-up whole life insurance policy, providing permanent coverage without further premium payments.
- Uses existing cash value.
- No more premium payments required.
- Converts to a smaller face amount whole life policy.
- Coverage remains permanent for the reduced face amount.
Memory trick: Don't Forfeit! Cash Out, Extend, or Reduce to keep some cover.