nonforfeiture

Nonforfeiture is a contractual concept that prevents the loss of certain rights or benefits when a future event would otherwise cause forfeiture, such as nonpayment, lapse, or contract termination. The term is most closely associated with long-term financial contracts, where it serves to protect a party’s earned value or protections.

In life insurance, nonforfeiture provisions guarantee that some value remains if premium payments cease. The main options typically available when a policy lapses due to nonpayment are: cash surrender value, which pays out the policy’s accumulated cash value (net of any outstanding loan and surrender charges) and ends the policy; reduced paid-up insurance, where the cash value is used to purchase a new, smaller policy with a fully paid-up death benefit; and extended term insurance, which uses the cash value to buy term coverage for the original death benefit amount, for as long as possible. The availability and terms of these options depend on the policy contract, the insured’s age, and prevailing values at the time of lapse.

Regulators and insurers use nonforfeiture provisions to protect consumers from complete loss of value in cash value policies, though the exact mechanics vary by policy and jurisdiction. Outside of life insurance, nonforfeiture clauses can appear in other long-term contracts to preserve earned rights or deposits, such as pension benefits in the event of plan termination or certain leases and agreements where forfeiture would otherwise occur.