Rhode Island Life Insurance Practice Exam

What happens if a policy lapses but contains a Nonforfeiture clause?

1. The policyholder loses all benefits

2. The policy remains intact for future claims

3. Guaranteed values will be available

4. The cash value is completely forfeited

The correct answer is: Guaranteed values will be available

When a life insurance policy contains a Nonforfeiture clause, it guarantees that the policyholder will receive certain benefits even if the policy lapses due to non-payment of premiums. The Nonforfeiture clause is designed to protect the policyholder's interests by ensuring that they do not lose all accumulated benefits immediately upon lapse. Instead, guaranteed values—such as the cash value—will be available to the policyholder, which they can access through different options, such as taking a reduced paid-up insurance policy or receiving cash upon surrender of the policy. This feature is significant because it provides a safety net for policyholders who may find themselves unable to keep up with premium payments, allowing them to still retain some value from their policy. In contrast, without a Nonforfeiture clause, the policyholder would lose all benefits entirely if the policy lapses.