Colorado Life Producer License Practice Test

When an insurance policy is canceled and the extended term nonforfeiture option is chosen, what is the result?

1. A new policy is issued at the current market rate

2. Term insurance equal to the face amount of the original policy is purchased

3. The insured loses all cash value

4. The policyholder receives cash immediately

The correct answer is: Term insurance equal to the face amount of the original policy is purchased

Choosing the extended term nonforfeiture option allows the policyholder to convert the cash value of a lapsed permanent life insurance policy into a term insurance policy with the same face amount as the original policy. In this scenario, the existing cash value is utilized to purchase a new term insurance policy rather than issuing a new permanent policy. This term policy is typically effective for a limited duration, based on the amount of cash value accrued prior to the lapse of the original policy. This option preserves the face amount of coverage, ensuring that the insured's beneficiaries will still receive benefits upon the insured's death, albeit within the limitations of a term policy. It provides a safeguard for the policyholder, allowing them to retain some coverage despite the policy lapsing without forfeiting the accumulated cash value that was built up during the life of the original policy. Other choices do not reflect the mechanics of the extended term nonforfeiture option accurately. For example, taking cash immediately or losing all cash value does not occur under this option, as the purpose of the extended term is to utilize that cash value towards new insurance coverage rather than sacrificing it entirely.