What Is Extended Term Insurance in Life Insurance?
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Extended term insurance is a way to use the cash value of a permanent life insurance policy to buy a term policy that lasts for a set number of years and has the same death benefit. It can be useful if you can no longer afford your life insurance premiums but you still need the coverage.
Most permanent life insurance policies, like whole life insurance, charge higher premiums than term life and use part of this money to build cash value over time. These policies typically contain a “nonforfeiture" clause, which means you won’t lose the cash value that’s accumulated if you cancel the policy or allow it to lapse.
Extended term insurance is a nonforfeiture option that lets you keep your life insurance coverage for some amount of time, even though your permanent policy ends. It replaces your permanent policy with a term policy, typically of the same face amount, paid for by your accumulated cash value.
The length of the term depends on how much cash value the policy has, as well as your age when you stopped making payments. If you have an outstanding policy loan, your insurance company will deduct the amount from its cash value first. The insurer will use the remaining amount to determine how much term life insurance you qualify for.
Pros and cons of extended term life insurance
The advantage of extended term insurance is that you can stop paying premiums and keep some coverage in place. If you die during the policy’s term, your loved ones will still receive a death benefit, which is the payout from a life insurance policy.
The downside is that you’re replacing permanent life coverage — which is typically meant to last your entire lifetime or until an advanced age — with short-term coverage. If you outlive the policy’s term, the policy will expire and your survivors won't get a payout when you die.
If you decide you no longer need coverage or you can no longer afford premiums on a permanent policy, you’ll also typically have the option of trading in the policy for its cash surrender value.
Learn more about permanent life insurance
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