What is true regarding the cash surrender nonforfeiture option?

The cash surrender nonforfeiture option allows a policyholder to cancel their life insurance policy and receive its cash value. When the policy is surrendered, any amount of cash value that exceeds the total premiums paid will be considered taxable as ordinary income. This taxation is because the IRS views the excess amount as income derived from the policy, given that the policyholder has already benefited from the premiums paid through coverage.

The other options generally do not accurately reflect the nature of the cash surrender process. For example, the policy does not remain active after surrender, nor does the policyholder receive the full original cash value since it is subject to reductions due to policy loans or previous withdrawals. Furthermore, there is no grace period in a traditional sense once the policy has been surrendered; instead, the coverage essentially ceases upon cash surrender. The primary focus of the cash surrender option is to allow the policyholder to access the cash value while recognizing any potential tax implications from the gains realized in the process.