Life & Health Insurance Exam (National Portion)Life InsuranceEasy
A policyowner allows their universal life insurance policy to lapse due to non-payment of premiums. Which of the following statements is true regarding the policy's cash value?
- AThe policy's cash value is used to purchase extended term insurance.
- BThe policy's cash value is converted into a paid-up whole life policy with a reduced death benefit.
- CThe policy's cash value is immediately forfeited to the insurer.
- DThe policy's cash value is returned to the policyowner as a lump sum, less any outstanding loans.
Show answer & explanationAnswer & explanation
Correct answer: D. The policy's cash value is returned to the policyowner as a lump sum, less any outstanding loans.
When a universal life policy lapses, the policyowner is entitled to receive the cash surrender value. This amount is paid out as a lump sum, minus any existing policy loans or surrender charges, rather than being forfeited or automatically converted into another form of insurance without the policyowner's election.
Why the other options are wrong
- A. Extended term insurance is a nonforfeiture option that the policyowner must typically elect, or it may be a default for whole life policies, but not automatically for universal life upon lapse.
- B. Converting to a paid-up whole life policy (reduced paid-up) is another nonforfeiture option that the policyowner must elect, not an automatic consequence of lapse for universal life.
- C. Forfeiture of cash value upon lapse is generally not permitted; policyowners are entitled to their accumulated cash value.
Universal Life Lapse
If a universal life policy lapses due to non-payment, the policyowner receives the accumulated cash value, less any outstanding loans and surrender charges.
- Cash value is not forfeited.
- Payment is a lump sum.
- Subject to surrender charges and outstanding loans.
Memory trick: When the 'Universal' coverage 'Lapses', your cash 'Returns' to you, not the insurer's 'Vault'.