Which of the following statements about nonforfeiture options found in life insurance policies is true?
A) Under the reduced paid-up option, the paid-up policy is term insurance.
B) Under the extended term option, the amount of term insurance is less than the face value of the surrendered cash value policy.
C) Under the reduced paid-up option, no additional premiums must be paid.
D) Unless the policyowner has selected another nonforfeiture option, the cash value option goes into effect automatically.
The Correct Answer and Explanation is :
The correct answer is: C) Under the reduced paid-up option, no additional premiums must be paid.
Explanation:
Nonforfeiture options in life insurance policies are provisions that allow policyholders to receive benefits from their policies even if they discontinue premium payments after a certain period. These options are crucial for ensuring that the policyholder does not lose the entire value of the insurance after having paid into it for years. Here’s a deeper look into the given options and why C is correct:
A) Under the reduced paid-up option, the paid-up policy is term insurance.
- This statement is incorrect. Under the reduced paid-up option, the policyholder can cease paying premiums and the policy will continue as a paid-up policy but not as term insurance. Instead, it converts to a whole life policy with a reduced face amount based on the cash value and the number of premiums already paid.
B) Under the extended term option, the amount of term insurance is less than the face value of the surrendered cash value policy.
- This statement is also incorrect. The extended term option allows the policyholder to use the policy’s cash surrender value to purchase term insurance for the full face value of the original policy, but for a shorter period.
C) Under the reduced paid-up option, no additional premiums must be paid.
- This is true. When a policyholder selects the reduced paid-up insurance option, they are no longer required to pay further premiums. The life insurance policy remains in force with a reduced face amount for the remainder of the policyholder’s life, without further premium payments. This makes it an attractive option for those who wish to stop paying premiums but still want coverage.
D) Unless the policyowner has selected another nonforfeiture option, the cash value option goes into effect automatically.
- This statement is incorrect. The automatic nonforfeiture option is usually the extended term insurance, not the cash value option. Policies generally specify which option becomes default if the policyholder does not make an explicit choice.
Now, let’s generate an image related to this explanation. I’ll create an illustration that visually depicts the concept of a reduced paid-up option in a life insurance policy.
Generating the image…
Here is the illustration depicting the concept of a reduced paid-up option in life insurance. It visually represents how the policy continues without further payments but with reduced benefits, using the metaphor of a smaller, yet sturdy house to symbolize the security and continuity of the policy.
