(1) A policy holder who desires to discontinue further premium payments on a policy on which not less than 3 years premiums have been paid shall, where the policy has a cash surrender value, be entitled on application to the company to receive in lieu of that policy a paid-up policy.
(2) Where a paid-up policy is issued under subsection (1) and the contingency occurs which would have rendered the company liable under the original policy, the company shall thereupon be liable under the paid-up policy, limited to its paid-up value.