3/18 - NonForfeiture Values

T2-L2-P3

NonForfeiture Values

Until the early 1900s, it was common for insurers to keep the cash value in the event that a policy lapsed or was surrendered.

The idea that it was the policy owner, not the insurer, who actually owned the cash value was not universally accepted until after the 1905 Armstrong investigation looked at a number of insurer abuses and ruled that cash values could not be forfeited to the insurer.

Let's look at a line from a typical policy Table of Guaranteed Values.

Such a table will be printed in every whole life policy and the cash or loan value will be guaranteed because they are based upon the assumed interest rate, the assumed mortality charges, and an assumption of loading for expenses that will be charged against the policy.

It involves a contract for $100,000 death benefit with a $2,000 premium. Now if we look at the Cash or Loan Value column, you will note that in the early years the cash value is very low. That is because this policy is front-loaded. In later years, the cash value grows significantly, because most of the expense charges were deducted in the very early years.

Table of Guaranteed Values
Face Amount $100,000: Annual Premium $2,000
Typical Table of Nonforfeiture Values for a Policy with a Face
Value of $100,000 and an Annual Premium of $2,000
Policy
Year		 $ Amt. of Cash
or Loan Value		 Reduced
Paid-up		 Extended Term Value
Years Days
1 0 0 0 0
2 49 205 1 60
3 955 3,590 2 285
4 2,142 7,245 6 15
5 3,987 12,020 8 120
6 5,972 16,100 10 152
7 7,206 19,850 12 10
8 9,338 23,795 14 25
9 11,409 27,600 15 290
10 13,000 30,850 16 359
12 16,774 37,775 18 125
15 26,984 47,100 16 310
20 47,898 64,025 13 50
Age 65 56,764 78,900 11 40

 

The example below is lifted from year 10 in the values table above

 

1 2 3 4
End of Policy Year Cash or Loan Value Reduced Paid-up Extended Term Years
10 $13,000 $30,850 16 yrs & 359 days

Column 1 - is the age of the policy.

Column 2 - is the Cash or Loan Value. Another name for that column might well be the Reserve Value, or as noted above, the NONFORFEITURE Value. It is also the surrender value. This means that all of the money posted in this column belongs to the policy owner.

Column 3 - represents the amount of single premium insurance paid up for life that would be purchased by the amount in the second column.

Note in the Tenth Year
You will note that in the tenth year, there is $13,000 of cash or loan value. That amount of money, $13,000, would buy a single premium, paid-up-for-life policy, for $30,850. That means that $13,000 at the assumed interest rate in the policy will amount to $30,850 at age 100 when the policy endows or matures.


In the event that the premium notice and after the grace period, the lapse notice were mailed to the payor and he/she failed to respond, then the insurance company is sitting with $13,000 in a lapsed contract. The insurer would like to take the unclaimed $13,000 and issue a paid-up-for-life insurance contract of $30,850. The original contract was for $100,000. This would reduce the insurers liability by more than two-thirds.

Column 4 - The state regulators realize that issuing a reduced paid-up-for-life policy is what the insurers would like to do; however, the regulators have ruled that since the person purchased $100,000 of death benefit, then $100,000 must have been what they needed and therefore, the $13,000 in abandoned cash value must be used to fund $100,000 of yearly renewable term each year for as many years as $13,000 will purchase that amount. This is known as extended term.

As the attained age of the insured rises through the years, more and more of the remainder of the $13,000 will be used to buy that one-year term insurance. Note in column four, that $13,000 of cash value will buy extended term for sixteen years and 359 days. This means that anytime in the next nearly seventeen years that this person should die, a death claim could be filed and the insurance company would pay $100,000. Any unused portion of the cash value may be claimed by the owner at any time before it is exhausted.

Note: Most contracts will state that the insurer has the right to defer payment for loans or policy surrenders for up to six months. This privilege has rarely been invoked, and then only in cases where a run on the cash would overrun the insurer's liquidity or policy legal reserves.