Understanding Extended Term Life Insurance: A Non-Forfeiture Benefit

Whole life insurance polices often have a non forfeiture options associated with them, extended term insurance is the most popular of those options.

Forfeiture

At one stage of the life insurance game if a person was unable to pay their premiums and did not make the payment by the grace period end, your policy would lapse and any equity you had built you would simply forfeit.

Needless to say that wasn’t a wonderful selling feature. While we buy whole life planning to keep it forever, life has a way of throwing us a curve ball every now and then and so no one could guarantee that they would reach a point where they could not pay the premiums.

The Non- Forfeiture Option

The insurance industry wanted to make whole life policies more attractive and so non-forfeiture options came into being with extended term insurance being one of the most popular.

What a non-forfeiture option does is allow you to quit paying the premiums but not forfeit the equity of your policy. The amount of cash value you will have built in your policy will be reduced by the amount of any loans against it.

The three non-forfeiture options are cash, reduced paid up insurance, and extended term insurance. We’ll focus on extended term insurance since it the most commonly used non-forfeiture option.

Extended Term is a Default Non-Forfeiture

Extended term insurance is the default non-forfeiture options. With the extended term insurance the face amount of the policy stays the same, but it is flipped to an extended term insurance policy. The equity you built is used to purchase a term policy that equals the number of years you paid premiums.

For example, if you purchase a policy when you were 20 years old and you paid until age 55, you would receive a term policy that is less than 35 years. Or if you were 35 years old when you purchased your policy and you paid until you were 45 years old, you would receive a term policy less than 10 years.

At any given time up within the defined period, you can transfer your extended term insurance back to the original policy for reinstatement.

The insurance company chooses which non-forfeiture options it will offer and extended term insurance may or may not be on that list, although it is the most common default. You can only opt for extended term insurance if you have actually built up a cash value.