What is a Non-Forfeiture Benefit in Life Insurance?

Life insurance plans are an important investment that safeguard your loved ones in your absence. This is why you need to thoroughly understand each part of your policy document. Knowing the ins and outs of your plan will help you make the right financial decisions, especially when it comes to securing your nominees. Life insurance policies have multiple clauses, terms, options, features and conditions that every policyholder should be aware of. One such clause is the ‘non-forfeiture’ benefit option, which can provide you with benefits even after your policy lapses! 

What is the Non-Forfeiture Benefit? 

Paying your life insurance premiums on time is essential if you want to keep your policy active. An insurance policy lapses if you fail to pay your due premiums during the grace period. However, a policy lapse does not necessarily mean that you your policy is completely terminated! When your plan has a non-forfeiture clause, you can still get a ‘paid-up’ life cover benefit or a partial refund of paid premiums via the ‘surrender value’. If you want to discontinue your policy, you need to understand how the non-forfeiture benefit works. 

Do All Plans Have a Non-Forfeiture Benefit? 

No, the non-forfeiture clause is not a default benefit offered in every life insurance plan. You will only be eligible for non-forfeiture benefits if your policy document specifically mentions such a clause. Generally, only guaranteed savings plans, and Unit-Linked Insurance Plans (ULIPs) have a non-forfeiture clause. Pure term insurance plans usually do not provide this benefit, except in the case of return of premium/money back plans. Please check your policy document or contact your insurance provider to find out if you’re eligible for non-forfeiture or not.  

When is Non-Forfeiture Applicable? 

Non-forfeiture benefits only apply once your policy lapses or if you willingly surrender your policy. Moreover, these benefits will only come into effect if you have already paid premiums for a few years. Generally, you need to pay premiums regularly for at least two years to be eligible for non-forfeiture benefits. The benefits you receive post policy lapse will be proportional to the premium amount you have already paid.  

Benefits That Fall Under Non-Forfeiture Clause 

The first thing to note is that there are two main ways to discontinue your policy. If you do not pay your premiums within the grace period, then your policy will lapse and will be converted to a reduced ‘paid-up’ plan. On the other hand, you can consciously choose to discontinue your plan by surrendering the policy. Both the surrender benefit and the paid-up benefit are only applicable if you have already paid premiums for at least two years.  

Reduced Paid-Up: 
If your policy has a non-forfeiture clause, and you have paid premiums for the first two policy years, your plan will be converted to a reduced paid-up upon lapsing. All your plan benefits will be recalculated as per the ‘reduced paid-up factor’. 

Reduced Paid-Up Factor =          Total number of months for which premiums are paid  
                                                Total number of months for which Premiums were originally payable   

Depending on the benefits offered by your plan, you will be eligible for: 

• Paid-Up Death Benefit: A reduced death benefit value based on your original sum assured and your reduced paid-up factor.  

• Paid-Up Maturity Benefit: If your plan has a savings element, you will also be eligible for a reduced maturity benefit which will be proportional to your paid-up factor.  

• Discontinued Policy Fund: If a Unit-Linked Insurance Plan (ULIP) lapses, a discontinuation charge will be applied to your current funds. Your funds will remain invested until maturity, however, you may choose to pull out your funds by surrendering your policy post the lock-in period.  

• Paid-Up Cash Bonus: A participating plan’s cash bonus element will also obtain a paid-up status. The paid-up cash bonus will be equal to the annual cash bonus amount (as per declared rate) multiplied by the reduced paid-up factor.  

Surrender Benefit: 
If you want to discontinue your policy and are not interested in paid-up benefits, simply choose to surrender your plan. Upon surrendering your policy, you will get back a part of your paid premiums as a surrender benefit. Your surrender value depends on the total premiums you have paid, plus any returns your plan has already accrued. Note that the surrender benefit is only applicable for endowment plans, ULIPs, and money back plans. Term insurance policies that are pure life cover plans do not provide any surrender benefit.  

As per your plan benefits, your surrender value may include: 

• A guaranteed surrender value that is a fraction of your total premiums paid.  

• A special surrender value that is calculated as per your policy’s accrued returns or bonus declarations.  

• A fraction of your fund value will be paid out as a surrender value in case of surrendered ULIPs.  

Conclusion 

It is always recommended to pay your premiums on time and keep your policy active. But if you want to discontinue a policy for any reason, rest assured that the premiums you have already paid need not go to waste. A paid-up plan can still provide all your plan benefits, albeit at a reduced rate. And if you would rather get cash in-hand, simply choose to surrender your policy.  

The non-forfeiture clause greatly benefits policyholders, as it prevents them from suffering a complete loss due to a policy lapse. You do not have to worry about losing all your money upon exiting a plan, and the premiums you have already paid will keep your plan active even if you stop your payments.  

However, while paid-up plans and surrender value protect you from suffering a complete loss, they are not an ideal solution. Both your life cover element and maturity benefits will be significantly higher if you pay your premiums on time. This is why it is essential to choose a policy that is both affordable and flexible. Choose a plan that has a favourable premium rate and premium paying term, so that you do not have to lapse or surrender your policy before maturity.

 

Aastha Mestry - Portfolio Manager 

An Author and a Full-Time Portfolio Manager, Aastha has 6 years of experience working in the Insurance Industry with businesses globally. With a profound interest in traveling, Aastha also loves to blog in her free time.