Nonforfeiture law

Nonforfeiture law

Nonforfeiture means exactly what it sounds like: the policyowner does not forfeit the value that has built up inside a life insurance policy just because premium payments stop. Texas, like every state, imposes a standard nonforfeiture law on life insurance policies delivered or issued for delivery in the state. It is part of the Insurance Code title that governs life insurance and annuities, and it works together with the required policy provisions for life insurance found in Chapter 1101.

What the law requires the policy to contain

A policy subject to the law must spell out, in the contract itself, what the owner keeps if premiums are not continued:

• A provision that, after premiums have been paid for the period stated in the policy, the insurer will grant a paid-up nonforfeiture benefit on the plan described in the policy.
• If the policy provides a cash surrender value, a provision letting the owner surrender the policy and take that value in cash instead of continued coverage.
• A table of guaranteed values showing the nonforfeiture benefits and cash surrender values available over a period of years, plus a statement of the method used to compute any value not shown in the table.
• The method of computation must satisfy the statutory minimum standard, so the guaranteed values can never be less than the floor the law sets.

Because the values are guaranteed and printed in the contract, a producer can point to the table during a sale — but should never promise more than the guaranteed column shows.

The classic options

When premiums stop and the grace period runs out, a cash-value policy typically offers three routes:

1. Cash surrender — take the guaranteed cash value in cash; coverage ends.
2. Reduced paid-up insurance — the value buys a smaller permanent face amount, fully paid up, lasting for life with no further premiums.
3. Extended term insurance — the value buys term insurance at the original (or reduced) face amount for as long as the value will carry it.

If the owner does not elect an option within the time the policy allows after default, the contract's automatic (default) nonforfeiture benefit takes effect, so the equity is not simply lost. Any outstanding policy loan or other indebtedness reduces the amount available under whichever option applies.

What is not covered

Nonforfeiture obligations attach to policies that accumulate value. A pure term policy with no cash value has nothing to surrender, so no surrender value is required. The same logic explains why very early-duration values are often zero: expenses have not yet been recovered.

Exam framing: nonforfeiture protects the owner's equity; the free-look, grace period, and reinstatement provisions protect the coverage. Do not mix them up.