Tennessee Life Producer Practice Exam

Which of the following is an example of a nonforfeiture option in insurance?

1. Cash surrender value

2. Reduced Paid-Up

3. Extended term insurance

4. Premium refund option

The correct answer is: Reduced Paid-Up

A nonforfeiture option refers to provisions that allow policyholders to receive certain benefits from their life insurance policy even if they stop paying premiums. This is critical for protecting the policyholder’s investment in the policy. "Reduced Paid-Up" is a nonforfeiture option where the policyholder can choose to use the cash value of their policy to purchase a reduced amount of paid-up insurance. This option allows the insured to maintain coverage without the need to pay additional premiums. In contrast, the cash surrender value simply allows the policyholder to receive the cash value of the policy if they choose to terminate it, but it doesn't offer continued insurance coverage. Extended term insurance does allow for continued coverage by converting the policy into a term policy for a certain period, but it is still different from the concept of having paid-up insurance as it typically requires the policyholder to take action to execute the option. The premium refund option usually pertains to terms around returning premiums rather than providing continued insurance coverage. Thus, Reduced Paid-Up is the most fitting example of a nonforfeiture option as it directly allows the policyholder to convert their policy into something that retains insurance benefits.