LIFE RIDERS, PROVISIONS, OPTIONS · 5 MIN READ

Nonforfeiture, Dividend, and Settlement Options

When a permanent policy stops being paid, nonforfeiture law guarantees the owner does not lose the accumulated cash value. The three standard nonforfeiture options are: cash surrender (take the cash value and end coverage, with gain over basis taxable); reduced paid-up insurance (use the cash value as a single premium to buy a smaller face amount of the same kind of permanent coverage, fully paid up for life); and extended term insurance (use the cash value to buy term insurance for the full original face amount lasting as long as the value will fund — often the automatic default). The choice trades face amount against duration: reduced paid-up shrinks the benefit but keeps it for life; extended term keeps the full benefit for a limited time. Participating policies pay dividends — a non-guaranteed return of premium surplus, which is why policy dividends are not taxable income. The five classic dividend options are cash, premium reduction, accumulation at interest (the interest earned is taxable), paid-up additions (small fully paid blocks of additional permanent insurance that add both death benefit and cash value with no underwriting), and one-year term (the fifth option, using the dividend to buy term coverage). When a policy loan is outstanding, carriers using direct recognition adjust the dividend on the loaned portion of cash value to reflect what the insurer actually earns on it, while non-direct recognition carriers credit the same dividend scale regardless of loans. Settlement options control how death proceeds are paid out. Interest-only holds the principal and pays interest, often with the beneficiary retaining withdrawal rights. Fixed-period pays the proceeds plus interest evenly over a chosen time span; the payment amount is the computed variable. Fixed-amount is the mirror image: the beneficiary picks the payment and the money lasts as long as principal plus interest allows — excess interest extends the period, and any balance at the beneficiary's death goes to a contingent payee. Life income options convert proceeds to a lifetime annuity, with or without a period certain; joint-and-survivor versions continue payments to a second payee. A spendthrift clause protects proceeds held under installment options from the beneficiary's creditors and prevents the beneficiary from assigning or commuting the payments.