South Carolina Life Insurance Practice Exam

When a reduced-paid up nonforfeiture option is chosen, what happens to the face amount of the policy?

1. It remains unchanged

2. It is increased based on dividends

3. It is reduced to the amount of what the cash value would buy as a single premium

4. It is forfeited

The correct answer is: It is reduced to the amount of what the cash value would buy as a single premium

Choosing a reduced-paid up nonforfeiture option means that the policyholder is opting to use the cash value of the policy to purchase a new, smaller life insurance policy, instead of continuing to pay premiums on the original policy. In this scenario, the face amount of the new policy is indeed reduced to a level that the available cash value can fund as a single premium. This process allows the policyholder to maintain some level of insurance coverage without needing to continue making monthly or yearly premium payments. The amount of coverage will be less than the original policy because it is based on what the cash value can buy, taking into account the policy’s mortality cost and other factors. Thus, while the original face amount is effectively reduced, the cash value is converted into paid-up insurance coverage that can provide beneficiaries with a death benefit, though it will not be as high as the initial face value of the original policy.