Texas General Lines — Life, Accident, Health and HMOTexas Statutes and Rules Specific to Life InsuranceHard
A life insurance policy in Texas has been in force for several years. The policyowner decides to cease paying premiums but does not want to lose the accumulated cash value. Which nonforfeiture option would allow the policyowner to use the cash value to purchase a new whole life policy with a reduced face amount?
- AAutomatic Premium Loan
- BCash Surrender Value
- CReduced Paid-Up Option
- DExtended Term Option
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, fully paid-up whole life policy with a smaller death benefit. The policy remains in force for the remainder of the insured's life.
Why the other options are wrong
- A. Automatic Premium Loan is a policy loan used to pay overdue premiums, not a nonforfeiture option for ceasing payments permanently.
- B. Cash Surrender Value pays out the cash value, terminating the policy.
- D. Extended Term Option uses the cash value to buy a term policy for the original face amount, but for a limited time.
Reduced Paid-Up Option
A nonforfeiture option that uses the accumulated cash value of a lapsed whole life policy as a single premium to purchase a new, fully paid-up whole life policy with a reduced face amount.
- No further premiums required.
- Policy remains in force for life.
- Death benefit is reduced.
- One of several nonforfeiture options.
Memory trick: Nonforfeiture: Cash value options, when premiums stop flowing.