When a life insurance policy is cancelled and the insured chooses the extended term nonforfeiture option, how is the cash value used?

When a life insurance policy is cancelled and the insured selects the extended term nonforfeiture option, the cash value of the policy is utilized to purchase a term life insurance policy with a death benefit that is equivalent to the original insurance policy. This allows the insured to maintain a similar level of protection, but only for a specified term, which is determined by the amount of cash value available.

The extended term option is a nonforfeiture benefit that permits the policyholder to use the accumulated cash value as a premium to purchase a new, single premium term policy, ensuring that the insured’s beneficiaries will still receive a death benefit during the extended term without needing to pay additional premiums. The duration of coverage provided under this new policy will last for as long as the cash value can purchase the term.

This option is advantageous for those who wish to retain some life insurance coverage after canceling their original policy without losing the value they had accumulated over time. Thus, option D accurately reflects the mechanics of how cash value is applied under the extended term nonforfeiture option.