Extended Term Insurance
Extended term insurance is a nonforfeiture option that uses the cash value of a permanent life insurance policy to purchase paid-up term insurance for the same face amount, lasting as long as the cash value allows.
Exam Tip
Extended term = SAME face amount for LIMITED time. Reduced paid-up = REDUCED face amount for LIFETIME. Know the difference!
What is Extended Term Insurance?
Extended term insurance is a nonforfeiture option available when a permanent life insurance policyholder stops paying premiums. The policy's cash value is used to purchase a paid-up term policy with the same death benefit, lasting for as long as the cash value can support.
How It Works
| Step | Action |
|---|---|
| 1 | Policyholder stops paying premiums |
| 2 | Cash value is calculated |
| 3 | Cash value purchases term insurance |
| 4 | Face amount stays the same |
| 5 | Coverage lasts specific period |
Key Features
| Feature | Description |
|---|---|
| Face Amount | Same as original policy |
| Duration | Based on cash value amount |
| Premium | None required |
| Cash Value | Fully used (none remains) |
Extended Term vs. Other Nonforfeiture Options
| Option | Death Benefit | Duration | Cash Value |
|---|---|---|---|
| Extended Term | Full original | Limited period | Used up |
| Reduced Paid-Up | Reduced | Lifetime | Continues growing |
| Cash Surrender | None | N/A | Paid to owner |
When Extended Term is Best
| Situation | Why Extended Term |
|---|---|
| Need full coverage | Maintains original face amount |
| Temporary lapse | Bridge until can resume payments |
| Health issues | Can't get new coverage |
| Limited budget | No ongoing premiums |
Limitations
| Limitation | Impact |
|---|---|
| No cash value | Cannot borrow against policy |
| Fixed duration | Coverage will eventually end |
| No dividends | Participating policy benefits lost |
| Riders lost | Additional benefits may terminate |
Example Calculation
| Policy Details | Values |
|---|---|
| Original Face | $100,000 |
| Cash Value | $15,000 |
| Extended Term | Same $100,000 |
| Duration | 12 years, 6 months |
Default Nonforfeiture Option
In most states, extended term is the automatic (default) nonforfeiture option if:
- Policyholder stops paying premiums
- Doesn't choose another option
- Grace period expires
Study This Term In
Related Terms
Nonforfeiture Options
InsuranceNonforfeiture options are provisions in permanent life insurance policies that allow policyholders to access accrued cash value if they stop paying premiums, rather than forfeiting all benefits.
Reduced Paid-Up Insurance
InsuranceReduced paid-up insurance is a nonforfeiture option that uses a policy's cash value to purchase a smaller permanent life insurance policy that is fully paid up, with no further premiums required but a reduced death benefit.
Cash Value
InsuranceCash value is the savings component of a permanent life insurance policy that grows tax-deferred and can be accessed through loans or withdrawals during the policyholder's lifetime.
Whole Life Insurance
InsuranceWhole life insurance provides permanent death benefit protection with guaranteed cash value accumulation, level premiums, and coverage that lasts your entire life.