Individual life nonforfeiture options and policy settlement

Two different questions

A permanent life policy that builds cash value raises two separate questions. Nonforfeiture options answer: what happens to that cash value if the policyowner stops paying premiums? Settlement options answer: how will the money be paid out when the policy matures or the insured dies? One protects a lapsing owner; the other shapes how a beneficiary (or an owner) receives proceeds.

Nonforfeiture: the cash value is not forfeited

Florida's Standard Nonforfeiture Law for Life Insurance (Fla. Stat. 627.476) says an individual life policy may not be delivered in Florida unless it promises that, if a premium is defaulted after premiums have been paid for at least 1 full year (ordinary insurance) or 3 full years (industrial insurance), the insurer will grant a paid-up nonforfeiture benefit on request made no later than 60 days after the due date of the premium in default. The benefit is effective as of that due date.

The three classic nonforfeiture options are:

• Cash surrender value: the owner surrenders the policy and takes the cash value. Coverage ends.
• Reduced paid-up insurance: the cash value is used as a net single premium, at the insured's then-current age, to buy a smaller policy of the same type that needs no further premiums. Florida requires policy forms filed on or after October 1, 1990, to include this option.
• Extended term insurance: the cash value buys term coverage for the full face amount for as long a period as it will pay for. Coverage then expires. In most policies this is the option applied automatically if the owner does not choose one.

An insurer may also substitute an actuarially equivalent alternative paid-up benefit, but only one that gives a greater amount or longer period of death benefit (or a greater or earlier endowment benefit).

How values are calculated

• If the default happens between anniversaries, values must allow for the time elapsed and any fractional premiums paid.
• Benefits added by rider, such as accidental death, disability benefits, and children's term coverage meeting the statute's conditions, are disregarded when figuring the required cash values and paid-up benefits.
• For policies issued before the valuation manual's operative date, the minimum nonforfeiture interest rate is 125 percent of the statutory valuation rate, rounded to the nearest quarter percent, and never less than 4 percent.

Settlement options: how proceeds are paid

Death proceeds are usually paid as a lump sum (cash), but the owner, or often the beneficiary, may choose another settlement option:

• Interest only: the insurer keeps the principal and pays interest; principal is paid later.
• Fixed period: principal plus interest paid in equal installments over a chosen number of years.
• Fixed amount: a chosen installment amount paid until principal and interest run out.
• Life income: payments for the payee's lifetime. Variations include straight life (payments stop at death), life with period certain, life with refund, and joint and survivor for two payees.

Memory hook: nonforfeiture is about stopping premiums; settlement is about paying out proceeds.

Scope in Florida

Part III of chapter 627 covers individual life and annuity contracts, not reinsurance, group life, or group annuities. Industrial life is generally outside Part III too, but the nonforfeiture law (627.476) is one of the sections that also applies to industrial life insurance.