What Is Extended Term in Life Insurance?

Extended term in life insurance is a non-forfeiture option within permanent life insurance policies that accumulate cash value. It prevents policyholders from losing built-up value if premium payments stop. This option allows individuals to continue life insurance coverage for a defined period without additional premium payments, utilizing the existing cash value. It can be beneficial for policyholders facing financial difficulties.

Non-Forfeiture Options

Non-forfeiture options are provisions within permanent life insurance policies that safeguard a policyholder’s accumulated value if premium payments cease. They ensure individuals receive some benefit from premiums paid. These options become available once a policy has built up sufficient cash value, typically after several years.

Life insurance policies generally offer three non-forfeiture options. The first is Cash Surrender Value, which allows policy cancellation for a lump sum of accumulated cash value. Another option is Reduced Paid-Up Insurance, which uses cash value to purchase a smaller, fully paid-up policy for the insured’s lifetime without further premiums. The third is Extended Term Insurance, which uses cash value to provide continued coverage for the original death benefit amount for a specific period.

The Mechanics of Extended Term

The Extended Term option activates when a policyholder stops paying premiums on a permanent life insurance policy. It is often the default choice if another non-forfeiture option is not selected after a premium lapse. The original policy’s accumulated cash value is then used as a single premium to purchase a new term life insurance policy.

This new term policy retains the original death benefit amount but for a limited duration. Factors determining duration include available cash value, insured’s age at conversion, original death benefit, health class, and prevailing interest rates. Older ages typically lead to shorter terms, while larger cash value allows for longer coverage.

Once Extended Term is in effect, no further premium payments are required. The cash value funding the new term policy is used up and does not continue to accumulate. The new term policy itself does not build cash value.

Outstanding policy loans at conversion significantly impact the Extended Term benefit. Loans reduce available cash value, shortening coverage duration or decreasing the death benefit. If a loan, including accrued interest, exceeds the policy’s cash value, the policy could lapse. If the insured dies with an unpaid loan, the outstanding balance and interest are deducted from the death benefit.

Extended Term Versus Other Options

Extended Term insurance differs from Reduced Paid-Up insurance. Extended Term maintains the original death benefit for a limited period, using the entire existing cash value to fund this temporary coverage.

In contrast, Reduced Paid-Up insurance offers lifetime coverage but with a significantly reduced death benefit. Its cash value may continue to grow, unlike Extended Term. Neither option requires further premium payments once activated.

Extended Term ensures life insurance coverage remains in force temporarily by converting cash value into a term policy; the policyholder does not receive a lump sum.

Conversely, Cash Surrender Value provides an immediate lump sum of accumulated cash value, after deductions. This terminates all life insurance coverage, leaving no future protection. It suits those needing immediate funds and willing to forgo insurance.

Key Policyholder Considerations

The Extended Term option is often the default non-forfeiture selection if no other choice is made when premiums stop. Insurers provide a grace period and notify policyholders before a policy lapses. Understanding this default is important.

Policyholders should consider the impact on riders. Most policy riders, like waiver of premium or accidental death benefit, typically terminate when the policy converts to Extended Term. This means original additional benefits may no longer be available.

Once Extended Term is activated, the original policy usually cannot be reinstated to its prior permanent status. This impacts future insurability; after the extended term expires, coverage ends. Obtaining new life insurance then requires a new application and underwriting, potentially leading to higher premiums due to age or health changes.