What is true about the cash surrender nonforfeiture option?

The cash surrender nonforfeiture option enables policyholders to terminate their life insurance policy and receive the current cash value of their policy instead of continuing coverage. This option is particularly relevant if the policyholder no longer needs life insurance or can no longer afford the premiums.

When a policyholder chooses to surrender their policy, the cash value they receive may exceed the total premiums they have paid in. This excess amount is considered a gain and is subject to taxation. Therefore, if the cash value received upon surrender is greater than the premiums that have been contributed, the difference is taxable as ordinary income. This understanding is critical for policyholders to make informed financial decisions when considering the cash surrender option.

The other options do not accurately reflect the nature of the cash surrender nonforfeiture option; for instance, it does not guarantee a full refund of premiums paid (the first option), it can be elected even before the policy matures (the third option), and it does not allow for partial withdrawals; rather, it involves a complete surrender of the policy.