Colorado Life Producer License Practice Test

Which nonforfeiture option provides coverage for the longest period of time?

1. Extended term

2. Cash surrender value

3. Reduced paid-up insurance

4. Automatic premium loan

The correct answer is: Reduced paid-up insurance

The correct answer is the option that pertains to reduced paid-up insurance. This nonforfeiture option allows a policyholder to stop paying premiums while still maintaining coverage. Instead of taking a cash surrender or using the policy’s value in a different way, the insurer will keep the policy in force for as long as possible using the accumulated cash value. This policy converts the original policy into a new, paid-up permanent insurance policy with a reduced death benefit. By opting for reduced paid-up insurance, the policyholder can enjoy extended coverage, even if they no longer wish or are able to pay premiums. This can be particularly beneficial for individuals who wish to maintain some level of protection for their beneficiaries without ongoing financial commitment. Other options, such as cash surrender value, provide immediate cash but do not offer any continued life insurance coverage. The extended term option allows the policy's cash value to purchase term insurance for a specified period, which might not last as long as reduced paid-up insurance. An automatic premium loan generally enables the insurer to use the policy's cash value to cover premiums but does not provide long-term coverage once the cash value is exhausted.