South Carolina Life and Health Practice Exam

A reduced paid-up nonforfeiture option means which of the following?

1. The policy remains active with full benefits

2. The policy has a decreased face amount

3. The policy can be cashed out for full value

4. The policy will expire without any benefits

The correct answer is: The policy has a decreased face amount

A reduced paid-up nonforfeiture option allows a policyholder to stop paying premiums on their whole life insurance policy while still retaining some benefits. When a policyholder selects this option, they convert their existing policy into a paid-up policy, which means that the policy will remain in force without requiring additional premium payments. However, the key characteristic of this option is that the face amount of the policy will be reduced according to the premiums that have been paid previously. By choosing this option, the insured essentially receives a smaller death benefit compared to what they would have received if premiums continued to be paid in full. This method allows policyholders to maintain some level of coverage rather than allowing their policy to lapse entirely, which would result in a complete loss of benefits. Thus, the correct understanding of the reduced paid-up option is that it results in a policy with a decreased face amount while still providing a form of coverage without ongoing premium obligations.