Tennessee Insurance Practice Exam

If D stops making premium payments on a Whole Life policy purchased 10 years ago, which Nonforfeiture Option will likely be enacted?

1. Paid-Up Coverage

2. Extended Term

3. Cash Surrender

4. Reinstatement Option

The correct answer is: Extended Term

When an individual stops making premium payments on a Whole Life policy, a Nonforfeiture Option is typically activated to ensure that the policyholder does not completely lose the benefits they have accumulated over the years. The Extended Term option is likely to be enacted because it allows the policyholder to use the cash value of the policy to purchase a term life insurance policy for the same face amount as the Whole Life policy. This ensures that the policyholder maintains life insurance coverage without having to pay premiums, albeit for a limited time. The Extended Term option is particularly advantageous for those who may not want to cash out their policy completely but still wish to retain some level of insurance protection for a specified duration, usually based on the cash value accumulated. This choice often provides a more favorable outcome than simply surrendering the policy for cash. While other options might also be available, such as Paid-Up Coverage or Cash Surrender, the Extended Term specifically allows for continued coverage without further premiums, making it a likely choice for someone who has stopped making payments. Reinstatement is not a Nonforfeiture Option; it relates to the possibility of reactivating a policy after it has lapsed, requiring the payment of overdue premiums and possibly other conditions.