Life & Health Insurance Exam (National Portion)Policy Provisions, Options, and RidersMedium
A policyowner allows a whole life insurance policy to lapse due to non-payment of premiums. The policy has accumulated cash value. If the policyowner does not choose a nonforfeiture option, what will typically be the insurer's automatic action?
- AThe policy's cash value will be forfeited to the insurer.
- BThe policy will be converted to Reduced Paid-Up Insurance.
- CThe policy will be reinstated with a penalty.
- DThe policy will be converted to Extended Term Insurance.
Show answer & explanationAnswer & explanation
Correct answer: D. The policy will be converted to Extended Term Insurance.
When a whole life policy with cash value lapses and the policyowner doesn't select a nonforfeiture option, Extended Term Insurance is typically the automatic default option. This option uses the cash value to purchase a single-premium term policy for the same face amount as the original policy, for as long a period as the cash value will buy.
Why the other options are wrong
- A. Cash value cannot be forfeited; nonforfeiture options protect it.
- B. Reduced Paid-Up is a nonforfeiture option but is usually not the automatic default.
- C. Reinstatement requires specific actions from the policyowner, not an automatic default.
Extended Term Insurance (Automatic Nonforfeiture)
A nonforfeiture option where the policy's cash value is used to purchase a single-premium term policy for the same face amount as the original policy, for as long a period as the cash value will buy.
- Automatic default if no option chosen
- Maintains original face amount
- Coverage for a limited duration
Memory trick: CASH for REDUCED TERM