How Extended Term Insurance Protects Your Policy Value?
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An extended term insurance policy is one that integrates with your life insurance policy, so it’s important to first know how a whole life insurance policy is set up.
As you pay premiums on a life insurance policy, the value of the policy accumulates. It combines a death payout benefit with a “cash value” that increases. Typically, you’re allowed to borrow against that cash value or use those funds in other ways.
Where extended term life insurance plays an important role though is when a policyholder stops making payments rather than letting the policy lapse. Instead of losing your investment into that policy, the insurer might offer life insurance nonforfeiture options.
If you’re now wondering “what is a nonforfeiture option?” then you’re on the right track to discovering the ways in which these policies can work for you! A nonforfeiture option describes a number of different products designed to protect the value of your policy should you no longer be able to make the premium payments.
The extended term life insurance option takes the value of your original whole life policy and uses the funds to purchase a term life policy in the same amount. The duration of the term policy is determined by the value of the account, so it remains in effect until the cash value of the account can no longer cover the cost of the premiums.
At the time when the extended term expires, the coverage would end unless new insurance is purchased or the original policy is reinstated.
For someone who wants life insurance coverage but cannot afford the premium payments anymore, extended term life insurance is an attractive option. Without making more investment into the policy you’re able to still maintain some semblance of security.
Like nearly all insurance policies though, there are limitations to consider. Ultimately the policy is going to expire and that will likely happen far sooner than a whole life policy might have. Plus, the cash value of the policy will not be accumulating and the policyholder will likely no longer receive dividend payments. It’s also important to know that unless you take any additional action there won’t be a residual benefit paid out.
Extended term life insurance is best suited for someone who wants life insurance coverage but is either no longer able to make premium payments or no longer wants to. Regardless of the reasons why this option gives people a chance to maintain coverage without the setback of making those payments. Since the option is typically intended for those wanting coverage without making payments, it’s typically a solution that is sought during times of financial distress.
The other primary consideration is when someone wants to ensure they’re covered with a death benefit in a short-term timeline. With the value of the policy not changing, this solution ensures that beneficiaries are paid in the event that the insured dies during the coverage period.
Learning more about life insurance nonforfeiture options such as extended term life insurance is a great head start on understanding ways to care for your family. Regardless of why you might consider ending your payments discussing options with your insurer is a smart way to ensure that you’re on the right path to financial security.
Paige Cerulli Paige Cerulli is a freelance content writer and journalist who specializes in personal finance topics. She graduated from Westfield State University and brings more than a decade of professional writing experience to the ConsumerCoverage team. Paige’s work has appeared in outlets including USA Today, Business Insider, and more.
