Non-Forfeiture options
MR. WATSON: Guys, before 1905, if you decided to cancel your policy, the company kept your cash value. How would that make you feel?
MAN: Ticked.
MR. WATSON: Kind of like that, yeah. Right. If you sold your home and the bank kept the equity, what would you think? Y'all wouldn't like it, would you? Before 1905, insurance companies kept your cash values. OUCH!!! Now, all states have adopted the NAIC's standard non-forfeiture options. Now, who does this cash value belong to? Policyholder. Do y'all agree?
ALL: Yes.
MR. WATSON: So, according to the chart below, you have a life insurance policy for $100,000. The premium is $2,000. Year 10. How much cash value do you have in it?
ALL: $13,005. (see chart below)
MR. WATSON: All right. You have $13,005 of cash value inside the policy.
MR. WATSON: Guys, if I decide I'm sick to death of paying insurance premiums, or I can no longer afford them, I have three options I can choose from to keep me from losing my cash value. They are called nonforfeiture options . Can I forfeit a non-forfeiture option?
ALL: No.
MR. WATSON: No. That is why they call it nonforfeiture option.
MR. WATSON: Nonforfeiture options apply to what? They apply to cash values. So the minute you have cash values, you have options that you cannot-
ALL: Forfeit.
MR. WATSON: So, do term policies have nonforfeiture options?
ALL: No!
MR. WATSON: Why?
ALL: No cash value.
MR. WATSON: Very good. Stupid question, wasn't it? Now three stories to illustrate each one.
Cash Surrender
MR. WATSON: The first option, it is year 10, and Jersey and I get divorced. The kids are grown and I feel I don't want or need insurance any longer. I am sick to death of paying for insurance I don't need.
MR. WATSON: So I cash in my policy. I can cash this thing in. I'm done with insurance. If I cash it in, what are they going to give me? (see chart above)
WOMAN: Cash value.
MR. WATSON: I cash it in, what will I get? Year 10.
WOMAN: $13,005, the cash value.
MR. WATSON: How much insurance will I have at that point in time?
ALL: None.
MR. WATSON: So, guys, at any point in time when I get tired of paying premiums, one of my options is to cash the policy in. I would have no insurance, and I get whatever cash is there. If I get back more than what I paid in, it will be taxed, I will have a gain. Does that make sense?
ALL: Yes.
