Life & Health Insurance Exam (National Portion)Life InsuranceHard
A life insurance policyowner has a policy with a $250,000 death benefit and a cash value of $50,000. If the policyowner chooses the Reduced Paid-Up nonforfeiture option, which of the following statements is true?
- AThe policy's cash value will be used as a single premium to purchase a fully paid-up policy with a reduced death benefit.
- BThe policy will be converted to an extended term policy for the original face amount.
- CThe policy will continue with the original death benefit, but premiums will be due for a reduced period.
- DThe policyowner will receive the cash value, and the policy will terminate.
Show answer & explanationAnswer & explanation
Correct answer: A. The policy's cash value will be used as a single premium to purchase a fully paid-up policy with a reduced death benefit.
The Reduced Paid-Up option uses the policy's existing cash value as a single premium to purchase a new, fully paid-up policy with a smaller death benefit than the original policy, but no further premiums are required.
Why the other options are wrong
- B. This describes the Extended Term nonforfeiture option, not Reduced Paid-Up.
- C. This describes a different type of policy adjustment, not the Reduced Paid-Up option.
- D. This describes the Cash Surrender nonforfeiture option, not Reduced Paid-Up.
Reduced Paid-Up Nonforfeiture Option
One of the nonforfeiture options available to a policyowner when a permanent life insurance policy lapses or is surrendered. The cash value is used as a single premium to purchase a new, fully paid-up policy with a lower death benefit.
- Policy remains in force for life (or until age 100/121).
- No further premium payments are required.
- The death benefit is reduced from the original face amount.
- The new policy is a whole life policy.
Memory trick: Nonforfeiture: Don't Lose Your Value, Choose Your Path.