What Is an Extended Term Insurance Policy?
Learn about extended term insurance: a life insurance feature that maintains your policy's coverage even when premiums stop.
Life insurance provides a financial safety net, offering a death benefit to beneficiaries upon the insured’s passing. This protection helps families manage expenses, cover debts, or maintain their standard of living. Extended term insurance is a specific feature within permanent life insurance policies, allowing policyholders to continue coverage without further premium payments.
How Extended Term Insurance Works
Extended term insurance is a feature of permanent life insurance policies, such as whole life or universal life, which accumulate cash value. When a policyholder stops paying premiums on a permanent policy, the accumulated cash value can fund a new term life insurance policy. This conversion allows the policyholder to maintain the original death benefit amount.
The duration of this new term policy is determined by the amount of cash value available and the insured’s age. The cash value acts as a single premium, purchasing a period of term coverage for the same face amount as the original policy. For example, if a policy had a $200,000 death benefit and sufficient cash value, it could be converted into a $200,000 term policy for a specific number of years.
Its Role as a Nonforfeiture Option
Extended term insurance functions as one of several “nonforfeiture options” available to policyholders of permanent life insurance. These options are provisions in a policy that prevent the forfeiture of accumulated value if premium payments cease. State regulations mandate that life insurance policies with cash value include such clauses, ensuring policyholders retain some benefit from their past payments.
This option is relevant when a policyholder can no longer afford or chooses to stop premium payments. Many insurance companies designate extended term insurance as the automatic or default nonforfeiture option if no other choice is made. Converting the policy to extended term preserves the full death benefit for a specific period, preventing a complete loss of coverage.
Other Nonforfeiture Options
Beyond extended term insurance, policyholders typically have other nonforfeiture options. Two common alternatives are cash surrender value and reduced paid-up insurance. These options provide different ways to utilize the accumulated cash value when premium payments are discontinued.
The cash surrender value option involves terminating the policy and receiving the accumulated cash value as a lump sum. This amount is the policy’s cash value minus any surrender charges or outstanding loans, and it results in the complete cessation of all insurance coverage. Any amount received that exceeds the total premiums paid into the policy may be subject to income tax.
Alternatively, reduced paid-up insurance uses the policy’s cash value to purchase a new, smaller permanent life insurance policy. This new policy remains in force for the rest of the insured’s life, and no further premium payments are required. While it offers lifelong coverage, the death benefit amount is reduced compared to the original policy, as it is based on the available cash value.