What happens to the cash value of a whole life policy when it is canceled for the extended term option?

When a whole life policy is canceled for the extended term option, the cash value is not forfeited; instead, it is utilized to convert the policy into a term policy for a specified duration. This means that the accumulated cash value effectively buys a term insurance policy, which provides coverage for a limited time without requiring further premium payments.

Choosing this option aligns with how extended term insurance operates, allowing the insured to maintain a form of life coverage by using the cash value as a premium for the new term policy. This mechanism provides a level of protection and value derived from the earlier whole life policy while transitioning to a different type of insurance.

In this context, the other choices do not accurately reflect the mechanics of this process. The option suggesting the cash value is forfeited is incorrect, as the value is preserved and applied to the new term policy. The option regarding immediate payout doesn't accurately represent how the transition works, as the value is instead converted into new coverage rather than paid out as a lump sum. The final option stating that the cash value remains part of the policy until death would be misleading, as the policy is effectively terminated and replaced with term coverage through this option.