Tennessee Insurance Practice Exam

Which of these is NOT an example of a non-forfeiture option?

1. Life income

2. Extended term

3. Reduced paid-up insurance

4. Cash surrender

The correct answer is: Life income

The identification of life income as an option that is not classified as a non-forfeiture option is accurate due to the nature of what non-forfeiture options represent. Non-forfeiture options are benefits that a policyholder can receive if they stop paying premiums on a whole life insurance policy. These options offer ways for the policyholder to still retain some value from the policy. In contrast to life income, non-forfeiture options include the extended term, which allows the policyholder to use the cash value of the policy to purchase term insurance for the same face amount for a specified period. Reduced paid-up insurance also falls under this category, allowing the policyholder to convert the policy into a smaller whole life policy without needing further premium payments. Cash surrender is another non-forfeiture option where the policyholder can choose to receive the cash value of the policy upon cancellation. Life income, on the other hand, is usually considered a settlement option rather than a non-forfeiture option. It provides a stream of income to the policyholder or their beneficiary rather than allowing them to retain the policy's benefits upon lapse or non-payment of premiums. Thus, the distinction lies in the fundamental purpose and function of these options within the life insurance framework.