Nonforfeiture Benefits. If, for whatever reason, you drop your coverage and you have a nonforfeiture benefit in your policy, you will receive some benefit value for the money you’ve paid into the policy. Without this type of benefit, you get nothing, even if you’ve paid premiums for 10 or 20 years before dropping the policy. Some states may require insurance companies to offer long term care insurance policies with a written offer of nonforfeiture benefit. In this case, you may be given benefit options with different premium costs, including reduced paid-up policies, shortened benefit period policies and extended term policies.
Under these benefit options, when you stop paying your premiums, the company gives you a paid-up policy. Depending on the option you chose, your paid-up policy either will have the same benefit period but with a lower daily benefit (reduced paid-up policy) or will have the same daily benefit but with a shorter benefit period (shortened benefit period policy or extended term policy). Under all of these options, the level of benefits you will receive depends on how long you paid premiums and the amount of premiums you have paid. Since it’s paid-up, you won’t owe any more premiums.
Other insurers may offer a “return of premium” nonforfeiture benefit. They pay back to you all or part of the premiums that you paid in if you drop your policy after a certain number of years. This is generally the most expensive type of nonforfeiture benefit. A nonforfeiture benefit can add roughly 10% to 100% (and sometimes more) to a policy’s cost. How much it adds depends on such things as your age at the time you bought the policy, the type of nonforfeiture benefit, and whether the policy has inflation protection. You have the option to add a nonforfeiture benefit if you’re buying a tax-qualified policy. The “return of premium” nonforfeiture benefit, the “reduced paid-up policy” and the “shortened benefit period policy” may be available options under a tax qualified policy if you drop the policy. You should consult a tax advisor to see if adding a nonforfeiture benefit would be good for you.
Contingent Nonforfeiture. In some states, if you don’t accept the offer of a nonforfeiture benefit, a company is required to provide a “contingent benefit upon lapse.” This means that when your premiums increase to a certain level (based on a table of increases), the “contingent benefit upon lapse” will take effect. For example, if you bought the policy at age 70 and did not accept the insurance company’s offer of a nonforfeiture benefit, if the premium rises to 40% more than the original premium, you will be offered the opportunity to accept one of the “contingent benefits upon lapse.” The benefits offered are: 1) a reduction in the benefits provided by the current policy so that premium costs stay the same; or 2) a conversion of the policy to paidup status with a shorter benefit period. You may also choose to keep your policy and continue to pay the higher premium.