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The Insurance Buying Guide: Nonforfeiture Provisions

Early LTC policies made no provision for nonforfeiture.

In other words, if you stopped paying premiums and allowed the policy to lapse (or died without ever having used the LTC benefit), you or your heirs received nothing in return for all those months or years during which you paid premiums.

Consumer advocates and state insurance departments took action, and now nonforfeiture provisions are offered as part of

most individual long-term care policies and group policies (where the employee is paying the premium).

The purpose of nonforfeiture provisions is to provide you with a mechanism whereby all policy values or benefits won't be forfeited, should you elect to stop paying premiums on the LTC policy.

Most commonly, when a policy lapses, you are offered either a return of premiums paid or a shortened benefit period. If you choose the latter, the benefit period will be adjusted so that it is equal to the type of policy you would have purchased, based on the total premiums already paid. In other words, if you were paying for a policy with a five-year benefit period but stopped paying premiums after several years, the insurance company might adjust the policy to provide a three-year benefit period. In addition, many policies provide that upon the death of the policyholder, there is a return of premiums paid, less any claims that have been paid out.

Insurance companies offer several different standard nonforfeiture options. It's wise to know which are relevant for the policy you're considering, in case you are unable to continue paying premiums at some point. The nonforfeiture options that would apply to LTC insurance include:

  • Cash Surrender Value. This is a guaranteed sum paid to you upon surrender or lapse of the policy. This sum generally is equal to some portion or percentage of the insurance company's policy reserve at the time premium payments cease.
  • Reduced Paid Up. This is 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. This provides an extension of insurance coverage for the full amount of the policy benefits without any further premium payments, for a limited period of time only.
  • Return of Premium. This provides a lump-sum cash payment equal to some percentage (60 percent, 80 percent, etc.) of the total premiums paid, paid to you when you surrender the policy or it lapses. Normally, any claims previously paid to you would be deducted from the amount returned.

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.

For example, Larry has paid $15,000 in premiums for his LTC policy and has had one claim totaling $5,000. The policy contains a 70 percent return of premium nonforfeiture provision. If Larry were to terminate his policy, he would be entitled to 70 percent of the premium paid (70% x $15,000 = $10,500), less the claim ($10,500 less $5,000 = $5,500).

A variation on this option is a return of premium in the form of banked LTC claims. Instead of the return of premium being paid in a lump sum, the value would be banked and paid out as future LTC claims until the banked amount was exhausted.

Without nonforfeiture provisions, if your policy lapses or you surrender it, you get nothing. All value and all premiums paid are lost. This is a major disadvantage if you never have a claim and terminate the policy. Contracts with nonforfeiture provisions provide that all is not lost -- an important point to consider when shopping for a policy.

Typically, you can reinstate a health insurance policy within a short time if it has lapsed for non-payment of premium. The length of time that you have to reinstate a policy often is expanded and enhanced with LTC policies.

Some insurers specify that you can reinstate an LTC policy up to six months, nine months or even 12 months after it has lapsed -- if the reason for the lapse was a cognitive impairment. Often, a senior citizen simply forgets to pay the premium, thinks it has already been paid or doesn't understand the purpose of the premium notice.

To qualify for reinstatement after the standard reinstatement period, you (or your representative) would have to submit a physician's report to the insurance company as proof of a cognitive impairment. Cognitive impairment means a deficiency in the ability to think, perceive, reason or remember, which results in the inability of individuals to take care of themselves without the assistance or supervision of another person.

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