Extension period insurance is an unrealized option for an entire life policy that uses the insurance's cash value to purchase forward insurance for the current benefit for the life of the deceased for a certain period of time. The function is primarily aimed at helping those who are in a situation where the entire life premium is no longer affordable. Instead of terminating their insurance and losing their death benefit protection, the extended insurance uses the value accumulated throughout the life insurance to continue the death benefit as a life insurance policy for a certain period of time.
Calculation of extended maturity and examples
The exact calculation used by life insurance companies will vary from company to company, but they will all generally be relatively close to each other. Let's assume you own an entire life policy with a death benefit of $ 500,000 and $ 20,000 in cash repurchase value. Due to job loss, you will no longer be able to pay the full life insurance premiums, but you will still need the $ 500,000 death benefit provided by the insurance. In this situation, you can choose an insurance feature for a longer period of time and keep your death benefit of $ 500,000 for now. The insurance company will calculate how many years your $ 20,000 cash value will buy you. The exact number of years depends on:
- The death benefit for your insurance.
- Your age when you trigger the insurance function for a longer term.
- The amount of cash value in your insurance at the time you trigger the function.
Let's assume that in this example we use, your $ 20,000 will buy you 22 years of your $ 500,000 death benefit. This means that when you officially redeem the extended insurance benefit, you will receive a death benefit of $ 500,000 for 22 years. You pay no additional premiums for these $ 500,000 during this 22-year period.
At the end of the 22-year period, your $ 500,000 life insurance will end and your death insurance will end.
You should know that once triggered, the extended insurance option is generally irrevocable. In other words, you can not regret it and return to your original life policy. You can not add money to the term life policy to keep it longer than the original number of years.
So, for example, using the numbers above, you have 22 years of $ 500,000 in life death. You can not offer to pay the insurance company more money to get a few extra years after 22.
It is also important to know that in general, the extended insurance option is the standard benefit for realization for most whole life policy. If you have not chosen the automatic premium loan function, the insurance company will activate the extended maturity insurance function if they do not receive your premium within the insurance period.
Is there any cash value accumulated after using this option?
No, once you have activated the extended maturity option, all your cash value goes to buy the number of years you have life cover. The term policy will not accumulate any future cash value.
You will also no longer receive any dividend by exercising this forfeiture option.
You will also generally lose all riders who are tied to your entire life policy, e.g. -up supplements and guaranteed future purchase options.
How is extended insurance different from reducing paid alternatives?
Both the extended maturity insurance and the reduced payment option are non-forfeit benefits that keep death protection in place. The main difference between them is that extension time insurance can keep the entire death benefit in effect while sacrificing the features of an entire life policy while the reduced paid option will keep all the entire life functions intact while sacrificing some level of the death benefit.
So practically, if the amount of the death benefit is most important, the long-term insurance option is your best choice. If the death benefit is secondary and your main goal is cash accumulation or tax functions throughout the life insurance, the option for reduced payment is the best option.
Advantages and disadvantages of the extended choice
The main advantage of the long-term insurance function is that it keeps your death protection in place at least in the short term and possibly for many years. This ensures that you have life insurance cover if you cannot pay your premium or if for some reason you do not pay your premium. Admittedly, there is some peace of mind from the function that knows that your life insurance coverage will remain even if something prevents you from paying the premium.
However, the alternative loses all the benefits of the whole life insurance and can generally not be reversed. If you plan to use your entire life policy to provide retirement income, long-term insurance may inadvertently disrupt this plan. In addition, the years of coverage purchased with the cash value may not be enough to give you sufficient death benefit coverage, but if so, you may not have much in the way of better alternatives.
Ultimately, the extended sight option is one of many features throughout life insurance policies. When matched to the right circumstances, it is a very valuable feature.