Nonforfeiture benefits are a term used by insurance providers and companies. What it means essentially is that if you drop your coverage without ever using it, the insurance will give you something back. Basically nonforfeiture benefits provide consumers (most of which are not able to maintain their premium payments by the time they reach the age they would use the policy) at least something for their premium dollars.
Without nonforfeiture benefits, once a consumer stops paying all rights under the policy end. And that is that, nothing is received. With it, you get one of two options: the reduced paid-up benefit, or the extended term benefit.
These two options are the most popular nonforfeiture benefits, so let’s look closer at them and see what they mean, and what it means to you the consumer should you not keep your policy until you use it:
Reduced paid-up benefit.
This form of nonforfeiture benefit is where the benefit pays the policy benefits at a reduced rate, depending upon how much money was paid into the insurance company. For example, if an individual paid premiums for 10 years, he might receive one-third of the benefit of a $100 a daily policy or $34 per day. The amount of reduced benefits is specified in the original contract. The reduced paid-up benefit amount will not increase for inflation and all policy restrictions apply. So in other words, if you pay your premium for a long time, and you can no longer afford it, so you drop coverage, should a need arise that would have been covered, they will still cover a portion of the cost.
Extended term benefit.
Under this concept the customer receives the originally specified daily benefit, but only for a reduced period depending upon how much money was paid to the carrier over the life of the policy. For example, after 10 years, 25% of the premium paid is credited to a “benefit account” and, if the policyholder qualifies, the company will pay benefits until the money in the account runs out. So let’s break this down even further and look at actual dollar amounts.So with the above scenario, after paying nearly $30,000 over 10 years the customer would be entitled to $7,500 in long-term care benefits. For many this roughly equals one month of nursing home care.
So, what does this mean? It means you are better off not buying LTC if you can’t maintain your premium, because even with nonforfeiture benefits, you pay for a whole lot more than you get. Don’t be fooled into thinking you got a good policy because it offers nonforfeiture benefits. At best, nonforfeiture benefits are similar to a consolation prize. Basically it is a little something paid by the carrier to customers who have guaranteed a profit to the company by never making a claim, paying premiums and then canceling the policy prior to qualifying for benefits.
Most people who purchase LTC do not maintain their policy until they use it. Insurance companies know this, and that is how they make their profit. So rather than looking at what you get if you drop coverage, look for a coverage you can afford, even if your income goes down, or becomes fixed.