diff --git a/llm/cli.py b/llm/cli.py
index 2e11e2c8..57f73828 100644
--- a/llm/cli.py
+++ b/llm/cli.py
@@ -673,8 +673,12 @@ def read_prompt():
             template_obj = load_template(template)
         except LoadTemplateError as ex:
             raise click.ClickException(str(ex))
-        extract = template_obj.extract
-        extract_last = template_obj.extract_last
+        extract = template_obj.extract if template_obj.extract is not None else extract
+        extract_last = (
+            template_obj.extract_last
+            if template_obj.extract_last is not None
+            else extract_last
+        )
         # Combine with template fragments/system_fragments
         if template_obj.fragments:
             fragments = [*template_obj.fragments, *fragments]
diff --git a/tests/test_templates.py b/tests/test_templates.py
index dcdabd9b..4f6d6250 100644
--- a/tests/test_templates.py
+++ b/tests/test_templates.py
@@ -546,3 +546,42 @@ def after():
     finally:
         after()
         pm.unregister(name="greetings-plugin")
+
+
+@mock.patch.dict(os.environ, {"OPENAI_API_KEY": "X"})
+def test_extract_last_flag_with_templates(templates_path, mocked_openai_chat):
+    """Test that --xl flag works with templates - issue #1296"""
+    # Create a template without extract_last set
+    (templates_path / "code-template.yaml").write_text(
+        "prompt: 'Write Python code for $input'", "utf-8"
+    )
+    runner = CliRunner()
+    # Test with --xl flag
+    result = runner.invoke(
+        cli,
+        ["--no-stream", "-t", "code-template", "hello world", "--xl"],
+        catch_exceptions=False,
+    )
+    assert result.exit_code == 0
+    # The output should be extracted code, not the full response
+    # Check that mocked response extraction was applied
+    assert "```" not in result.output.strip()
+
+
+@mock.patch.dict(os.environ, {"OPENAI_API_KEY": "X"})
+def test_extract_last_in_template_with_cli_flag(templates_path, mocked_openai_chat):
+    """Test that CLI --xl flag works even when template has extract_last: false"""
+    # Create a template with extract_last explicitly set to false
+    (templates_path / "no-extract-template.yaml").write_text(
+        "prompt: 'Write Python code for $input'\nextract_last: false", "utf-8"
+    )
+    runner = CliRunner()
+    # Test with --xl flag - should override template setting
+    result = runner.invoke(
+        cli,
+        ["--no-stream", "-t", "no-extract-template", "hello world", "--xl"],
+        catch_exceptions=False,
+    )
+    assert result.exit_code == 0
+    # The output should be extracted code since CLI flag should take precedence
+    assert "```" not in result.output.strip()