When you purchase a life insurance policy, there are a lot of terminologies you may need to understand. Life insurance plans in India offer a range of different benefits and features, but to be able to make the most of your life insurance policy, you should be familiar with all the terms and clauses mentioned in the policy document.
Most people in India choose to purchase an online life insurance policy as it is a quick and hassle-free process that can also help save some money through the comparison of different plans. However, not many people go through the fine print of the policy document, which includes some important clauses. One such clause is the Non-Forfeiture Option, which you should use to your advantage if needed. Here is what you should know about the Non-Forfeiture Option.
What is a Non-Forfeiture Option?
To simplify the meaning of the non-forfeiture clause, let’s look into a small example. Mita purchases a savings insurance policy and pays the policy premiums for 2 years on the whole premium payment term towards the savings and the life insurance cover. However, after 2 years, she decides to surrender her policy due to her inability to continue the premium payments. In this case, she would have had to forfeit the policy benefits and any premium amount that she had already paid towards the policy. Hence, this can be a loss for her which may discourage her from getting a new life insurance plan in the future. However, the non-forfeiture clause of Mita’s policy will enable her to obtain partial benefits or partial reimbursement of the premiums.
While pure term insurance plans that only offer a simple life cover do not offer non-forfeiture benefits, a savings life insurance plan that offers guaranteed1 returns carries a non-forfeiture clause.
In such a case, the non-forfeiture clause will be effective if the policy lapses due to the non-payment of the premiums. The insured or the policyholder can get the whole or partial benefits of the savings plan, depending on how much of the premium paying term is completed.
This clause will also be effective if a policyholder chooses to surrender their policy, provided they have paid the premiums as per the terms and conditions of the policy. One may receive a portion of the total policy premiums paid or the policy’s cash surrender value or a reduced paid-up benefit as per the premiums paid before the lapse.
How Does the Non- Forfeiture Clause Work?
For life insurance plans in India, you always have an option to surrender the policy after the payment of premiums for a certain premium payment term. Apart from pure term insurance plans, any policy that offers guaranteed1 returns, such as a savings policy or a money-back policy, will offer a minimum cash value once the policy has been surrendered. To know how this works, these are the four non-forfeiture benefit options:
- Policy termination, after which the cash surrender value.
- Reduced life insurance coverage for the rest of the policy term.
- Payment of the premiums through the accumulated cash value.
- Purchase an extended term plan with the remaining cash surrender value (CSV).
Here is what you should know about the non-forfeiture options:
- Once the policy has been surrendered, the death benefit under the policy will not be available anymore. This can be true either for a whole life insurance policy or a savings insurance policy.
- If you have taken a loan against the insurance plan, as offered by some insurance providers, any outstanding loan amounts will be made from the cash value before the remaining cash value is paid out to you, the policyholder.
- You do not have to pay back any amount from the loan against the policy from your own pocket. This amount will be deducted either from the cash value (as mentioned above) or the death benefit, and an interest rate of between 5% to 9% can be charged on loan. It is better to pay off the loan amount soon so that the unpaid interest does not increase due to compound interest.
- In the case of some insurance policies and according to the life insurance guidelines of some life insurance providers, the cash value you receive can be used to avail of a pure term insurance plan. However, the sum assured and the policy period can be calculated as per your current age at the time of buying the term insurance policy.
If you select a savings plan from TATA AIA Life Insurance plans, these are the following non-forfeiture provisions under the policy:
- Lapse of the Policy
- Surrender Benefit
- Reduced Paid-Up
It is also important to note that if you do not surrender the policy but fail to pay the policy premiums, your life insurance policy will be converted to a reduced-paid up policy which does not offer any other bonuses2 unless the policy has been revived within 5 years of the first unpaid premium. However, the death benefit, survival benefit and maturity benefit under your life insurance policy can be payable as per the policy terms and conditions.
The non-forfeiture clause under a life insurance policy is meant to protect the interests of the policyholder, so they do not lose out on the benefits of the premiums they have already paid. However, when you have a life insurance plan, always be sure to choose the policy and the premium amount carefully so that you can continue paying the premiums and enjoy the policy benefits until the end of the policy term.