AD Banker Comprehensive Practice Exam

What may the insurance company do if an insured allows a permanent policy to lapse?

1. May apply the cash values to purchase additional paid up insurance

2. May exercise any nonforfeiture option it deems appropriate

3. Applies the remaining cash values into a deferred annuity

4. Will automatically institute the extended term option

The correct answer is: Will automatically institute the extended term option

The correct choice indicates that when an insured allows a permanent policy to lapse, the insurance company will automatically institute the extended term option. This option is one of the common nonforfeiture provisions that is built into many permanent life insurance policies. When a policyholder allows their permanent life insurance policy to lapse, they typically have built up a cash value due to the nature of these policies. The extended term option allows the insured to use their accumulated cash value to purchase a term insurance policy for a specified amount of time, usually equivalent to the face value of the original permanent policy. This means that the insured still maintains some level of life insurance coverage even after the lapse, without needing to reapply or undergo new underwriting procedures. Understanding this concept is crucial because it highlights how insurers protect the policyholders' interests by providing options so they do not lose their investment entirely when premiums are not paid. While other choices such as applying cash values to purchase additional paid-up insurance or exercising any nonforfeiture options could be available at the policyholder's discretion, these actions are not automatic and would require the policyholder to take specific steps. Therefore, the automatic implementation of the extended term option is the most straightforward and guaranteed action by the insurance company when