Texas General Lines — Life, Accident, Health and HMOTexas Statutes and Rules Specific to Life InsuranceMedium
A life insurance policyholder in Texas decides to stop paying premiums on their whole life policy, which has accumulated significant cash value. They want to ensure their family still receives some death benefit without paying further premiums. Which nonforfeiture option should they choose?
- AReduced Paid-Up Option
- BCash Surrender Value
- CAutomatic Premium Loan
- DExtended Term Option
Show answer & explanationAnswer & explanation
Correct answer: A. Reduced Paid-Up Option
The Reduced Paid-Up option uses the policy's cash value to purchase a new, fully paid-up policy of the same type, but with a reduced face amount. No further premiums are required, and coverage continues for life.
Why the other options are wrong
- B. Cash Surrender Value would pay out the cash value, terminating the policy and ending all death benefit coverage.
- C. Automatic Premium Loan uses the cash value to pay premiums, which the policyholder wants to avoid paying altogether, and it doesn't result in a paid-up policy.
- D. Extended Term Option would provide the full face amount for a limited period, but the question implies a desire for continued (though reduced) coverage for life, not a temporary period.
Reduced Paid-Up Option
A nonforfeiture option in a cash value life insurance policy where the accumulated cash value is used as a single premium to purchase a new, fully paid-up policy with a reduced face amount. Coverage continues for the life of the insured, with no further premiums required.
- Uses cash value as a single premium.
- Results in a smaller, fully paid-up policy.
- No further premiums required.
- Coverage continues for the insured's lifetime.
Memory trick: No more payments, but a reduced payout, forever stout.