What Is Extended Term Insurance and Who Should Buy It?

Extended term insurance is a nonforfeiture option available within permanent life insurance policies that accumulate cash value. This feature allows policyholders to use the accumulated cash value to purchase term insurance, thus continuing life coverage without the need for further premium payments.

The extended term insurance nonforfeiture option provides a solution for individuals experiencing economic shifts that impact their ability to maintain regular premium payments on a permanent life policy.

Extended term insurance transforms the cash value of your permanent life insurance policy into term life coverage, effectively extending your protection for a predetermined period without further payments.

To activate the extended term nonforfeiture option, a policyholder must have accrued enough cash value in the life insurance policy to fully fund the new term coverage. This ensures that the death benefit remains unchanged from the original permanent life insurance, continuing the policyholder's coverage.

The cash value in life insurance ensures that, after the extended term life nonforfeiture option is chosen, the available insurance will be consistent with the original coverage terms.

To calculate costs for extended term insurance, insurers use the accumulated cash value of the permanent life policy and factor in the insured's age at the time of conversion. This ensures coverage continuation without new premium payments.

Insurers apply the total cash value as a pre-paid premium for the term insurance, which directly determines the term's duration. The insured’s age influences the cost per year of term coverage, establishing how long the cash value can maintain the policy.

Understanding the advantages and limitations of extended term life insurance is important for policyholders considering this option. This will help determine whether this feature is suitable for their needs and financial goals.

Benefits of Extended Term Insurance

• Continued Coverage Without Premiums: Having a feature that allows you to extend term life insurance ensures maintenance of coverage amount. You use the accumulated cash value from a permanent life policy instead of paying premiums.
• No Medical Exams Required: This transition typically does not require life insurance medical exams, simplifying the process for policyholders.

Potential Drawbacks of Extended Term Insurance

• Temporary Coverage: The coverage under the extended term option in life insurance is limited to the term purchased with the cash value, which may not meet long-term needs.
• Loss of Benefits: Policyholders might lose benefits associated with permanent life policies, like cash accumulation and dividends.

Extended term life insurance can be a valuable safety net for those undergoing significant financial change. Here's who might benefit most from this option:

While extended term life insurance offers a valuable solution for maintaining coverage during financially restrictive times, it may not be suitable for everyone. Those seeking long-term security without the need to monitor cash value accumulation or those who can comfortably afford ongoing premiums might prefer other types of life insurance policies that provide permanent coverage without the need for conversion.

Extended term insurance is just one of several nonforfeiture options for life insurance policyholders wishing to preserve coverage despite financial challenges. Each option offers distinct benefits and trade-offs, making it important to evaluate personal needs and future plans when considering nonforfeiture alternatives.

• Cash Surrender Value: This option allows policyholders to cancel their policy and receive the accumulated cash value as a lump sum. It's best for those who need immediate access to cash and are willing to forego future coverage. The cash surrender value of life insurance is typically less than the total premiums paid but can provide a significant cash influx when needed.

• Paid-Up Insurance: Choosing paid-up insurance means reducing the policy's death benefit to a level that the existing cash value can support without further premiums. This option is preferable for those who want to ensure lifelong coverage but cannot continue paying premiums. It allows the policyholder to maintain a smaller amount of coverage indefinitely without additional costs.

Choosing the right nonforfeiture option depends heavily on individual financial circumstances and coverage goals. While cash surrender provides immediate liquidity, paid-up insurance offers a reduced yet permanent safety net and extended term insurance ensures continued coverage for a set term without ongoing costs.

Explore common questions about extended term insurance to understand how this nonforfeiture option can benefit you and fit your insurance needs.