Question 32

Extended term uses the cash value to buy paid-up term insurance.

Extended term insurance allows the policyholder to use the cash value of the policy to purchase a term policy with the same face amount as the original policy, effectively extending coverage for a specified period without requiring additional premiums.

A) Reduced paid-up

Reduced paid-up insurance converts the policy's cash value into a permanent policy with a reduced face amount. While it utilizes the cash value, it does not provide term insurance, making it an incorrect choice for this question.

B) Extended term

Extended term is the correct choice as it specifically employs the cash value of the original policy to purchase term insurance. This option ensures that the policyholder retains a level of coverage after the original policy lapses.

C) Cash surrender

Cash surrender involves terminating the policy in exchange for its cash value. This option does not provide any insurance coverage afterward and therefore does not relate to buying paid-up term insurance.

D) Automatic premium loan

An automatic premium loan allows the insurer to use the cash value to pay overdue premiums, ensuring the policy remains in force. However, it does not involve purchasing additional insurance, making it an unsuitable option for this question.

Conclusion

The extended term option is definitively correct as it allows the policyholder to maintain insurance coverage by converting cash value into term insurance. In contrast, all other options either reduce coverage or terminate the policy altogether, failing to meet the criteria of utilizing cash value for term insurance.