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UPDATED: Sep 15, 2020
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When you stop paying premiums and allow a cash value policy to lapse, one of the nonforfeiture options comes into play. Three of the most common options are:
1. extended term insurance. Often this is the automatic option. The cash value (minus any outstanding loans) is used to pay for insurance equal to the face amount of the policy for. The coverage will continue for whatever length of time the available cash can buy. Once the cash value is depleted, the policy has no further value.
2. reduced paid up insurance. The cash value can be used to pay for a reduced amount of insurance. The cash value purchases a single premium, fully paid up policy of the same type as the original plan.
3. cash surrender value. The policy is surrendered to the insurance company which then pays the policyholder the current cash value.