Indiana State Life and Health Insurance Practice Exam

Which Nonforfeiture Option continues to build up cash value?

1. Waiver of Premium

2. Extended Term

3. Reduced Paid-Up

4. Cash Surrender

The correct answer is: Reduced Paid-Up

The option that continues to build up cash value is the Reduced Paid-Up option. When a policyholder chooses this nonforfeiture option, they can convert their existing whole life policy into a new paid-up whole life policy, which means that no further premiums are required. The new policy will have a reduced face amount based on the original policy’s cash value. The key aspect of the Reduced Paid-Up option is that while the face amount is reduced, the policy still maintains its status as a whole life policy, which means it will continue to accumulate cash value over time. This is advantageous for policyholders who want to keep their life insurance coverage intact without having to continue making premium payments. In contrast, other options such as Waiver of Premium do not pertain to the accumulation of cash value; they simply allow the policyholder to skip premium payments under certain circumstances. The Extended Term option provides coverage for a limited period based on the cash value but does not build cash value since it effectively turns the policy into term insurance. Lastly, the Cash Surrender option involves liquidating the policy for its cash value, ending any further coverage and cash accumulation. Thus, the Reduced Paid-Up option is unique in its ability to maintain a cash value build-up