Extended term insurance allows you to use the cash worth of a permanent life insurance policy to purchase a term policy that lasts a specific number of years and has the same death benefit. It can be beneficial if you can no longer afford your life insurance rates but still require coverage.
Most permanent life insurance policies, such as whole life insurance, charge higher premiums than term life insurance and use some of that money to accumulate cash value over time. These plans often include a “nonforfeiture” clause, which means you won’t lose the accumulated cash value if you cancel or let the insurance lapse.
Extended term insurance is a non-forfeiture alternative that allows you to continue receiving life insurance coverage for a set period of time after your permanent policy expires. It substitutes your permanent policy with a term policy of the same face amount, which is paid for using your accumulated cash value.
The duration of the term is determined by the policy’s cash value and your age at the time you stopped making payments. If you have an outstanding policy debt, your insurance company will deduct the amount from the cash value first. The insurer will use the remaining amount to determine the amount of term life insurance you qualify for.
Pros and cons of extended term life insurance
The benefit of extended term insurance is that you can stop paying premiums while keeping some coverage in place. If you die during the policy’s term, your beneficiaries will still get a death benefit, which is the payout from a life insurance policy.
The disadvantage is that you are replacing permanent life insurance, which is normally designed to last your entire life or until you reach an elderly age, with short-term coverage. If you outlive the policy’s term, the policy will expire, and your beneficiaries will not get a payout when you die.
If you decide you no longer need coverage or cannot afford the premiums on a permanent policy, you will normally be able to trade it in for cash surrender value.
