Non-Forfeiture Clause in Life Insurance

This is where the non-forfeiture clause becomes important. A non-forfeiture clause in life insurance ensures that the policyholder does not lose the complete benefit of the policy, even if they can no longer pay the premiums. It allows them to receive some form of benefit or reduced coverage, rather than letting the policy lapse entirely.

What Is a Non-Forfeiture Clause?

A non-forfeiture clause is a provision in traditional life insurance policies (typically whole life or endowment policies) that protects the policyholder’s accumulated benefits if they stop paying premiums after a certain period. This non-forfeiture clause guarantees that the insurance company will offer alternative benefits instead of simply cancelling the policy and keeping all the premiums paid.

In simple terms, you won’t lose the entire life insurance benefit just because you can’t pay future premiums.

When Does the Non-Forfeiture Clause Apply?

This non-forfeiture clause becomes applicable when:

• The policy has built up a cash value (usually after premiums have been paid for a few years, often 2–3 years).

• The policyholder decides to stop paying premiums voluntarily or due to financial difficulty.

The life insurance company will then offer one of the non-forfeiture options available under the policy.

Options for Non-Forfeiture in Life Insurance

There are generally the following three common options offered under a non-forfeiture clause:

1. Surrender Value

   Under the surrender value option, the following would happen:

   • The policyholder terminates the policy.

   • The insurer pays out the accumulated cash value minus charges.

   • Once the surrender value is paid, the policy ends and no further benefits are payable.

   • This is a lump-sum payout, often used when the policyholder needs funds urgently.

2. Reduced Paid-Up Insurance

   The reduced-paid up option offers the following benefits:

   • The policy continues without further premium payments, but with a reduced sum assured.

   • The benefit is paid on the death of the life assured or on maturity, depending on the policy type.

   • This option is ideal for those who want to retain some life cover without continuing to pay premiums.

3. Extended Term Insurance

   • The policy’s accumulated cash value is used to purchase term insurance for the original sum assured.

   • Coverage continues for a certain number of years, but only for death benefit, no maturity benefit is paid.

   • The term depends on the amount of cash value available.

   Note: Not all types of life insurance policies offer all three options. The available non-forfeiture clause options may vary depending on the insurer and the type of policy.

Why Is the Non-Forfeiture Clause Important?

The non-forfeiture clause acts as a safety net for policyholders. It ensures that:

• You don’t lose all the money paid if you can’t continue the policy.

• Your family may still receive some protection or benefit.

• You retain some control over how your policy is managed during difficult times.

For long-term policies like whole life insurance, endowment, or money-back plans, this clause is especially valuable.

Does the Non-Forfeiture Clause Apply to Term Insurance?

No. Pure term insurance plans do not have a non-forfeiture clause because they do not build any cash value. If premiums are not paid within the grace period, the policy lapses without any return. Only cash-value insurance policies include non-forfeiture options.

How the Non-Forfeiture Clause Works?

Let’s say:

• You purchase a ₹10 lakh endowment policy with a 20-year term.

• You’ve paid premiums for 5 years and built up a cash value of ₹1.5 lakh.

• You now want to stop paying premiums.

Your options under the non-forfeiture clause:

• Surrender the policy and receive ₹1.5 lakh (minus charges).

• Convert the policy to reduced paid-up insurance, where your sum assured reduces (e.g., from ₹10 lakh to ₹4 lakh), but the policy continues without further payments.

• Use the ₹1.5 lakh to buy extended term insurance for ₹10 lakh, valid for the next 7–8 years.

Non-Forfeiture Clause in India as per IRDAI

In India, the Insurance Regulatory and Development Authority of India (IRDAI) mandates that traditional life insurance policies must provide surrender and paid-up values after the minimum premium payment period (usually after 2 or 3 years, depending on the plan).

Each insurer must clearly disclose:

• The surrender value schedule

• Eligibility for reduced paid-up benefits

• Applicable charges and deductions

This ensures transparency and protection for policyholders.

Final Thoughts

The non-forfeiture clause in life insurance is an important consumer-friendly feature that protects your invested money and gives you flexible options when you can’t continue premium payments. It ensures that years of financial discipline don't go to waste.