Taking Care of Mom and Dad: Nonforfeiture Provisions

Nonforfeiture provisions return some of your parents' investment if they drop their coverage. These provisions became a big selling point for LTC insurance in the 1990s. Without them, LTC insurance provides no recovery for the policyholder who lapses the policy or -- more commonly -- who dies without having needed LTC benefits. If your parents cancel coverage or die suddenly after 10 or 20 years and never use any of policy benefits, their loss could be significant.

Standard nonforfeiture options in LTC insurance include:

• Cash Surrender Value. A guaranteed sum is paid to the policyholder upon surrender or lapsing of the policy. This sum is generally equal to some portion or percentage of the insurer's policy reserve at the time premiums cease.
• Reduced Paid Up. A lesser or reduced amount of daily benefit payable for the maximum length of the policy's benefit period with no further premium payments required.
• Extended Term. A limited extension of insurance coverage for the full amount of the policy benefits without any further premium payments, for a limited period of time only. The reduced paid up and extended term options are paid from the policy's cash value. These are fairly standard and are very similar to the nonforfeiture options found in permanent life insurance policies.
• Return of Premium. A lump sum cash payment equal to some percentage (60 percent, 80 percent, etc.) of the total premiums paid is paid to the policyholder upon lapsing or surrendering the policy. Normally, any claims previously paid would be deducted from the return.

Some LTC insurance companies have been accused of "predatory pricing" -- keeping initial premiums low but increasing them dramatically, "squeezing out" policyholders who cannot afford the premium payments and allow the policies to lapse.

In a similar context, policies sold without an inflation protection provision could leave your parents with inadequate coverage years later, when they make a claim.

Some insurers argue that nonforfeiture values were not contemplated when premium rates were developed, and that adding nonforfeiture provisions to long-term care policies will increase premiums up to 100 percent. Others have shrugged off these claims and make nonforfeiture values a selling point.