Especially in this “new economy,” life insurance professionals need to be very familiar with nonforfeiture benefits and other policyholder-friendly features of life insurance products.
Clients in rough financial situations may need to use the features or at least know that they exist, “just in case” their money gets too tight.
So, here is a refresher.
Nonforfeiture benefits became a unique feature of United States life insurance products, as far back as the 1800s. They were the brainchild of a Massachusetts regulator named Elizur Wright.
They became embedded in The Standard Nonforfeiture Law, which was adopted (with minor variations) by every state in the nation.
That law has been repeatedly tweaked, but remains a proud feature of U.S. regulation, designed to protect the public from unwarranted forfeiture of accumulated funds in a life insurance policy.
This law effectively applies to all forms of traditional permanent insurance. (Most term plans are exempt because the required formulas generate no cash values for them.) It requires calculations to be made on specified mortality tables and interest rates.
(A changeover has just been made to the 2001 Commissioners Standard Ordinary mortality tables; but most of today’s in-force products are based on earlier tables–the 1980 CSO or the 1961 CSO tables. Over the years, maximum interest rates have been specified for use with the tables.)
What are nonforfeiture benefits? Generally, for traditional products, the law requires a cash value and one or both of the following: (1) a reduced paid-up life insurance benefit and (2) extended term life insurance. These are mathematically equivalent to the cash value.