Non-forfeiture laws are standard in every state and thus are standard in every whole life insurance policy. A non-forfeiture provision is one that guarantees that a policy owner will receive, upon the lapse or cancellation of the whole life policy, a return equal to the cash value in the policy. There are three standard options: 1) Extended Term 2) Reduced Paid-Up 3) Cash Surrender

Extended Term If the insurer does not receive instruction to the contrary within 60 days after a policy lapses, the insurer will use the available cash value to purchase term insurance in the same face amount as the original whole life policy, for as long a term as the cash value will allow.

Reduced Paid-Up This option will use the cash value to purchase a paid up policy of the same type as the lapsed policy, but for a lesser face amount. No further premiums will be due and the policy owner still owns a whole life policy.

Cash Surrender Insurers are required to make cash surrender values available after the third year for an ordinary policy, although most insurers make the cash values available sooner. Insurers put a table of minimum cash surrender values in their policies.

**NOTE** There are ONLY 3 Non-forfeiture options: 1) Extended Term 2) Reduced Paid-Up 3) Cash Surrender Reinstatement is NOT a Non-forfeiture option. ********************************

As discussed earlier, mutual life insurance companies issue participating policies that may pay policy dividends.Dividends are surplus that is distributed to participating policy owners in proportion to the face value of their contract. In computing premium rates, mutual companies intentionally overestimate their future needs for funds. These overcharges provide additional protection to the insurer in the event that operating costs are higher than anticipated, and assure policy owners that a dividend will be forthcoming.

Policy dividends, unlike stock dividends, are not subject to personal income taxation because they are considered a return of premium. Dividends cannot be guaranteed by an insurer. A participating policy owner has several options of what to do with a dividend, common dividend options include...

Cash The policy owner may elect to receive the dividend as a cash payment. Reduce Premium Payments The dividend may be used to offset future premiums. Accumulate at Interest The dividend may be left with the insurer to accumulate interest. While the dividend is paid tax free, any interest received is taxable to the recipient as ordinary income.

Paid-Up Additions The policy owner may use the dividends to purchase a single premium policy of the same type with no evidence of insurability. One-Year Term This option allows the insured to use the dividend to purchase a one-year term policy for whatever face amount can be obtained using the available dividend. Policy dividends paid to policy owners (rather than share holders) are considered a return of premium, and are NOT taxable.

At some point, if not lapsed or surrendered for its cash value, a life insurance policy is going to pay its benefit. That's the unique thing about life insurance--it is the only type of insurance with an inevitable covered peril. In this state, life insurance companies are required to pay death claims within 60 days after proper notification of claim is received. The beneficiary has several settlement options to choose from. •Cash •Fixed Period •Fixed Amount •Interest Only •Life Income

**NOTE** For the purpose of the exam, the death benefit will be paid tax free. However, if the insurer pays you any interest on the death benefit, the interest is taxed as ordinary income. *******************************

Most beneficiaries select the cash option and receive a tax-free lump-sum payment from the insurance company. Fixed Period A specified amount is paid for a specified period. If the beneficiary dies during this payout period, the company would continue payments to that person's beneficiary for the remainder of the period. The amount of payment depends on the face amount, the rate of interest, and the payout period. Fixed Amount This is similar to the fixed period option, except that a predetermined benefit payment

except that a predetermined benefit payment amount is selected and payments will be paid for whatever length of time is possible, given the face amount and rate of interest. Interest Only With this option, the proceeds are held by the insurance company, which pays a guaranteed rate of interest. Life Income The life income option will, in lieu of a lump sum distribution, provide the beneficiary with a guaranteed monthly payment for life.