California Life-Only & Accident and Health AgentLife InsuranceMedium
A client purchased a life insurance policy 7 years ago. Due to recent health issues, they are unable to pay their premiums but do not want to lose the value built up in their policy. They want to use the policy's cash value to continue their coverage for as long as possible, but with a reduced death benefit. Which nonforfeiture option should they choose?
- ACash Surrender Value
- BReduced Paid-Up Option
- CExtended Term Option
- DAutomatic Premium Loan
Show answer & explanationAnswer & explanation
Correct answer: B. Reduced Paid-Up Option
The Reduced Paid-Up Option uses the policy's cash value as a single premium to purchase a new, fully paid-up policy of the same type, but for a reduced death benefit. This allows the client to maintain coverage for life without further premium payments, aligning with their desire to continue coverage with a reduced death benefit.
Why the other options are wrong
- A. Cash Surrender Value would terminate the policy and pay out the cash value, ending coverage.
- C. Extended Term Option would use the cash value to purchase a term policy for the original face amount for a limited time, not for as long as possible with a reduced death benefit.
- D. Automatic Premium Loan would borrow from the cash value to pay premiums, but it's a loan and still requires repayment; it doesn't stop future premium obligations.
Reduced Paid-Up Option
A nonforfeiture option that uses the cash value of a lapsed policy to purchase a new, fully paid-up life insurance policy with a reduced death benefit.
- No further premiums are required.
- Coverage continues for the insured's entire life.
- The death benefit is lower than the original policy's face amount.
Memory trick: Cash, Extended, Reduced: Don't forfeit your policy's value.