Maryland Life and Health Insurance License Practice Exam

Which of the following best describes nonforfeiture options?

1. Options to switch insurance companies

2. Options that prevent policy lapse

3. Options allowing access to policy loans

4. Options for retaining some value if the policy is surrendered

The correct answer is: Options for retaining some value if the policy is surrendered

Nonforfeiture options refer to provisions found in life insurance policies that allow the policyholder to retain some value from the policy if they decide to surrender it or if the policy lapses due to non-payment of premiums. These options ensure that the insurance policyholder does not lose all the benefits of their investment in the policy. When a policyholder has a nonforfeiture option, they can typically choose to receive a reduced paid-up insurance policy, extended term insurance, or a cash surrender value. This concept is particularly important because it provides a safety net for policyholders, especially if they face financial challenges and can no longer maintain the full premium payments. In contrast, the other options do not accurately capture the essence of nonforfeiture options. Switching insurance companies pertains to a completely different aspect of policy management, while preventing policy lapse and accessing policy loans are functionalities that do not inherently relate to the preservation of value upon policy surrender. Therefore, the best description of nonforfeiture options is the one that emphasizes retaining some value if the policy is surrendered.