Which of the following statements about nonforfeiture options found in life insurance policies is true? Under the cash value option, the insurer can delay payment for up to six months. Unless the policyowner has elected another option, the cash value option goes into effect in most companies. Under the extended term option, the amount of term insurance is a function of the number of years the policy has been in force. Under the reduced paid-up option, the paid-up policy is a form of term insurance. 2nts
The Correct Answer and Explanation is:
The correct statement is:
Under the extended term option, the amount of term insurance is a function of the number of years the policy has been in force.
Explanation:
Nonforfeiture options are choices available to a policyholder when they stop paying premiums on a life insurance policy that has accumulated cash value. These options allow the policyholder to avoid forfeiting the policy’s benefits entirely. Below are the details about each option:
- Cash Value Option:
Under this option, the policyholder can receive the accumulated cash value of the policy. The statement that the insurer can delay payment for up to six months is incorrect. While the insurer can take some time to process the request, they are required to pay the cash value promptly and not delay it for such an extended period. Therefore, this statement is misleading. - Extended Term Option:
The extended term option allows the policyholder to use the policy’s cash value to purchase term insurance for the same face amount as the original policy. The amount of term insurance is indeed a function of the number of years the policy has been in force. This means the cash value is used to buy term coverage for the longest possible term based on the accumulated value, and as time passes, the term coverage decreases as the cash value depletes. This statement is true. - Reduced Paid-Up Option:
In this option, the policyholder uses the cash value to purchase a reduced amount of paid-up life insurance, which does not require future premiums. The statement that the paid-up policy is a form of term insurance is incorrect because the reduced paid-up policy is a form of permanent life insurance, not term insurance. Term insurance is temporary, while paid-up insurance provides lifelong coverage, albeit for a reduced death benefit.
Therefore, the correct and true statement pertains to the extended term option.
