Do Non-Forfeiture Options Apply to Term Life Insurance?
When you don't need your life insurance policy anymore, one option is to cancel the contract. Because life insurance contracts are unilateral, the insurance company is obligated to abide by the terms set forth in the contract but there is no legal compulsion for you to pay premiums. When you cancel your term life insurance, you might have a non-forfeiture option available to you.
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Identification
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A non-forfeiture option is an option on a life insurance policy that allows you to recoup the cost of premiums you've paid. Examples of non-forfeiture options would include a return of the premiums you've paid, or the option to convert the policy to a policy that pays non-forfeiture options.
Types
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A non-forfeiture option can be either a full option or partial. A partial non-forfeiture option would be the partial surrender of a life insurance policy. Partial surrenders are also referred to as "withdrawals" from a cash value policy. Part of the policy is surrendered, and you receive the cash value associated with part of the death benefit. This is why withdrawals permanently decrease the death benefit of the policy on cash value policies. A full non-forfeiture option is when you withdraw all of the cash value of the policy, thus canceling the policy. Another example of a full non-forfeiture option is when you receive a refund of premiums paid on a term life policy.
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Significance
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A return of your premiums means that your premium dollars have not been wasted if you never used your term life insurance. Since term insurance does not usually extend beyond 30 years, it's temporary insurance. You cannot be certain that you will ever use the death benefit.
Misconceptions
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A common misconception is that since term life insurance does not have a cash value account like permanent life insurance does, that there are no non-forfeiture options associated with term life insurance. A cash value account is a savings account that is attached to a permanent life insurance policy. The non-forfeiture options of a cash value policy allow the policyholder to turn in the policy for the value of the cash value. A term life policy, however, may offer non-forfeiture options if it offers a return of premium. The return of premium allows the policyholder to receive a return of all premiums paid to the policy plus interest that is determined at the start of the contract. You may also have convertibility options allowing you to convert your term life policy to a permanent policy as a non-forfeiture option.
Considerations
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The return of premium option can easily double the premium of a term life policy. Consider whether this option is the best choice available to you. You may consider putting that extra money into a savings account or some other investment where you will earn interest that exceeds what you receive back from the insurer.
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