Extended Term Insurance

Extended term insurance is a non-forfeiture option available in some life insurance policies that allows the policyholder to use the cash value of their policy to purchase a term life insurance policy with the same death benefit as the original policy, but for a limited term. This option is typically used when the policyholder can no longer afford to pay the premiums on their permanent life insurance policy but wants to maintain some level of death benefit protection.

Here’s how extended term insurance works

• Cash Value: The policyholder must have a life insurance policy with a cash value component, such as a whole life or universal life policy.
• Non-Forfeiture Option: Extended term insurance is one of several non-forfeiture options available to policyholders who stop paying premiums on their permanent life insurance policies.
• Coverage: The cash value is used to purchase a term life insurance policy with the same death benefit as the original policy.
• Term Length: The term of the new policy is determined by the amount of cash value available and the insured’s age. The higher the cash value and the younger the insured, the longer the term of the extended term insurance.
• No Further Premiums: No further premium payments are required for the extended term insurance.

Benefits of Extended Term Insurance

• Maintains Death Benefit: Allows the policyholder to maintain a death benefit for a limited time, even if they can’t afford to pay premiums.
• No Medical Exam: No medical exam or evidence of insurability is required to exercise this option.
• Flexibility: Provides flexibility for policyholders facing financial difficulties or changing insurance needs.

Example

A policyholder has a whole life insurance policy with a death benefit of $250,000 and a cash value of $20,000. They can no longer afford to pay the premiums. They choose the extended term insurance option, and the cash value is used to purchase a term life insurance policy with a death benefit of $250,000 for a term of 10 years.

Global Perspective

Extended term insurance is a common non-forfeiture option offered in many countries around the world. It provides a valuable safety net for policyholders who want to maintain some level of life insurance protection even when they cannot continue paying premiums on their permanent policies.

Extended term insurance is a useful option for policyholders seeking to maximize the value of their life insurance policy and maintain a death benefit during a period of financial hardship or changing needs. However, it’s important to understand the limitations of this option, including the limited term of coverage and the fact that the death benefit will cease at the end of the term.