Purchasing life insurance is a decision that must hold over years if not decades. What happens if something changes significantly such as losing a job. What if you can’t continue to pay the life insurance premium? This is where non-forfeiture comes into play for most permanent plans. It may be a core part of the policy or it may be a rider. Let’s look a little at the world of non-forfeiture and why term life insurance is a key strategy to avoid ever having to worry about it.
When we may make purchases, we’re going with an expectation of our current financial situation remaining the same or hopefully improving. What’s the alternative, right? Things happen. The economy takes a large downturn and you loose your job and benefits. If you’re like many Americans, there’s not enough to savings to maintain your current expense and debt load for an extended period of time. You write out your monthly budget to see what can go. The Cable bill goes. That extra car lease goes. There’s your life insurance premium. Hmm. You know you need life insurance but this is crunch time. You weigh the odds versus that monthly line item staring up at you.
First, the best way to avoid having to make this decision is inherent in the nature of term life insurance rates. Term life is the epitome of cheap life insurance. Compared to whole, universal, etc, it can be 1/10th the cost for a similar guaranteed amount of life protection. $50/monthly is much easier to swallow and will likely make the cut mentioned above over $300/monthly with whole life insurance. This is why you want adequate insurance coverage but make sure to avoid over-insuring. Non-forfeiture is added to many permanent life insurance options such as whole because the premium is so much higher and therefore more at risk in such a downturn. In our view, it’s a smoke screen. The pitch is basically, “Hey, if you get into trouble financially, you’ll have this non forfeiture option where you’ll get money back”. It’s the no harm – no foul reply. It’s important to understand how the “cash value” is financed by a much larger premium that you are paying to have whole life over term at our more in depth term life and investing article.
That being said, let’s at least look at the non-forfeiture options which can occur in a few different flavors.
The first is Cash Surrender Value which means they will return the accrued cash value usually minus loan amounts or interest on loans. The policy then ceases coverage. Great…so we get back a portion of the extra premium we paid (whole versus term life rate) and now we have no coverage. Thanks!!
Reduced Paid Up option. With this option, you can have your cash value go towards a reduced amount of paid up coverage. Again, now they’re using our extra premium to buy a reduced amount of expensive whole life insurance.
Extended Term. With this option they take our cash value and buy term life insurance…which is probably the what should have been purchased from the beginning.
You may also be able to use the dividends to pay as much premium as possible or take a loan out against cash value to pay premium.
The important consideration with all these non-forfeiture options is that they primarily based on “cash value”. The problem with cash value is that it’s your cash…minus the life insurance company’s cut. This cut can be significant and so all these options really amount to a sales technique to overcome the natural questions that arises in most people comparing life insurance…”What if I can’t afford to make the premium”. The more direct answer would be “Hey, we can take the watered down cash value which is only a percentage of the extra premium you gave us and let you use it…oh and your coverage probably ends”. This is our take on it and ultimately you need to make your own decision but If I were buying life insurance, you know where I would put my dollars.