The extended term nonforfeiture option uses the permanent policy ' s available cash value as a single premium to purchase term insurance generally equal to the original policy ' s face amount, after appropriate adjustments for outstanding indebtedness. The amount of available cash value determines how long the term protection can remain in force.
This contrasts with the reduced paid-up insurance option. Reduced paid-up insurance uses the cash value to purchase a smaller amount of permanent insurance that requires no further premiums. Thus, reduced paid-up maintains permanent coverage at a lower face amount, whereas extended term generally preserves the original face amount for a limited period.
Extended term does not simply extend the original policy beyond its stated contractual term. It represents a conversion of accumulated nonforfeiture value into term protection after premium payments on a cash-value policy cease. Nor does the insurer merely invest the cash value to increase benefits.
Nonforfeiture provisions protect the policyowner ' s accumulated equity and prevent that value from being entirely lost when a permanent policy is surrendered or premiums are discontinued.
Therefore, B precisely states the operation of extended term insurance.
Study Guide Reference: Life Insurance Policy Provisions, Options, and Riders — nonforfeiture options; extended term; reduced paid-up insurance; cash surrender.
