Tennessee Insurance Practice Exam

What does a nonforfeiture clause guarantee to the policyholder?

1. Guaranteed interest rates

2. Guaranteed values even if the policy has lapsed

3. Guaranteed renewal options

4. Guaranteed payout within 1 year

The correct answer is: Guaranteed values even if the policy has lapsed

A nonforfeiture clause is a provision in a life insurance policy that protects the policyholder by guaranteeing certain benefits even if the policy lapses due to nonpayment of premiums. Specifically, this clause ensures that the policyholder will receive some form of value, such as a cash surrender value or extended term insurance, despite the lapse. This is particularly important as it provides financial security and ensures that the policyholder does not lose all benefits accrued during the period when premiums were paid. As a result, the nonforfeiture clause embodies the principle that policyholders are entitled to some value from their investment in the insurance policy, even if they cannot continue making premium payments. Other options may sound appealing but do not align with what a nonforfeiture clause specifically offers. For example, guaranteed interest rates pertain more to specific types of interest-bearing accounts or products rather than to the guarantees provided in a lapse situation. Guaranteed renewal options generally relate to policy renewals at the end of a term but not to the nonforfeiture aspect. Lastly, a guaranteed payout within a year does not accurately reflect the core function of a nonforfeiture clause, which is about preserving value after a policy might otherwise become void.