Term life insurance is one of the most common forms of life insurance. Unlike whole life insurance, which offers coverage for the policyholder’s entire life, term life insurance provides coverage for a predetermined number of years—typically 10, 20, or 30 years. It’s known for its affordability, simplicity, and flexibility, making it a popular choice for many individuals. But when it comes to accessing the policy’s cash value, the situation is quite different from permanent life insurance options. A common question that arises is: can you cash out a term life insurance policy?
In this article, we’ll explore what cashing out a term life insurance policy means, the circumstances under which it might be possible, and what you should consider if you’re thinking about surrendering your policy.
Understanding Term Life Insurance
Before delving into whether you can cash out a term life insurance policy, it’s essential to understand how term life insurance works. Term life insurance is designed to provide financial protection for a set period. If the policyholder dies during the term, their beneficiaries receive a death benefit payout. However, if the policyholder outlives the term, the policy expires, and no payout is given.
One of the key features of term life insurance is that it does not accumulate any cash value, unlike whole life or universal life insurance policies. Whole life insurance policies build cash value over time, which the policyholder can access through loans or withdrawals. Term life insurance, on the other hand, is strictly designed to provide a death benefit and does not include a savings or investment component.
Cashing Out a Term Life Insurance Policy
Unlike permanent life insurance policies, term life insurance policies do not accumulate a cash value that policyholders can access during their lifetime. So, no, you generally cannot cash out a term life insurance policy in the way you might with a whole life policy.
However, this doesn’t mean that there are no options available to a policyholder who might want to access some form of benefit during their lifetime. Some circumstances allow a policyholder to either modify or cancel their term life insurance policy to get some value back. These options include:
1. Surrendering the Policy
Most term life insurance policies do not allow you to “cash out” in the traditional sense, but some insurers may allow you to surrender the policy. Surrendering a term life insurance policy means you cancel the policy and stop making premium payments.
However, since term policies do not accumulate cash value, you typically won’t receive any refund or payout upon surrendering. The only exception may be if you have a return of premium (ROP) term life insurance policy.
Return of Premium (ROP) Policies
A return of premium policy is a specific type of term life insurance that offers a refund of the premiums paid if the policyholder survives the entire term. If you have this type of policy, you may be able to “cash out” the policy at the end of the term by receiving a refund of all the premiums you paid over the years. This is not common, though, and ROP policies tend to be more expensive than standard term life insurance due to the potential for a refund.
It’s important to note that ROP policies can only be cashed out at the end of the term, and they will not accumulate any cash value during the policy term. Essentially, if you outlive the policy term, you receive a refund, but if you pass away during the term, the death benefit is still paid out to your beneficiaries.
2. Converting to a Permanent Policy
If you still need life insurance coverage but no longer wish to have term life insurance, you may have the option to convert your term policy to a permanent life insurance policy. Many term life insurance policies offer a conversion option, which allows you to switch to a whole or universal life insurance policy without undergoing a medical exam or proving insurability.
While this doesn’t provide an immediate “cash out” option, converting to a permanent policy can allow you to accumulate cash value over time. You can borrow against this cash value or, in some cases, cash it out if you decide to cancel the policy later on. However, the premiums for permanent policies are significantly higher than for term policies, so this option may not always be ideal for everyone.
3. Selling the Policy (Life Settlement)
In some cases, policyholders may choose to sell their term life insurance policy in a life settlement transaction. Life settlements typically apply to permanent life insurance policies but can sometimes be available for term life insurance policies, especially if they have a high death benefit.
A life settlement involves selling your life insurance policy to a third party in exchange for a lump sum payment. The buyer then assumes responsibility for the premiums and becomes the beneficiary of the policy upon your death. This is a complicated process and not all term policies are eligible for life settlements, but it may be an option for some individuals looking for immediate cash.
4. Accelerated Death Benefit Rider
Some term life insurance policies come with an accelerated death benefit rider, which allows the policyholder to access a portion of the death benefit while still alive under certain circumstances. These circumstances usually involve a terminal illness diagnosis or a severe medical condition where the policyholder is expected to live for only a short period.
This rider can provide the policyholder with funds to cover medical bills, long-term care, or other expenses. While this does not allow you to “cash out” the policy in the traditional sense, it does provide access to the death benefit while the policyholder is alive.
Considerations Before Cancelling or Converting a Term Life Insurance Policy
If you’re thinking about cancelling, surrendering, or converting your term life insurance policy, there are several factors to consider:
- Cost of Conversion: Converting a term life policy to a permanent policy may involve significantly higher premiums. Ensure that you can afford the higher premiums before making this decision.
- Impact on Coverage: If you surrender or cancel the policy and you don’t have another form of life insurance in place, you may lose important coverage. It’s essential to carefully evaluate your life insurance needs before making any changes.
- Financial Needs: Consider whether you truly need the life insurance policy to be cashed out. If your goal is to access funds, a life settlement or an accelerated death benefit rider may be better alternatives. However, life settlements often result in a lower payout than expected.
- Tax Implications: Cashing out, converting, or selling a life insurance policy can have tax implications. It’s important to speak with a financial advisor to understand the tax consequences of any action.
Conclusion
In conclusion, you cannot cash out a standard term life insurance policy because it does not build any cash value. However, there are some options for accessing funds from your policy, such as surrendering it (only in certain cases), converting it to a permanent policy, or selling it through a life settlement. Additionally, if your term policy includes an accelerated death benefit rider, you may be able to access part of the death benefit early under certain conditions.
If you’re considering cashing out your term life insurance policy, it’s essential to fully understand your options and the financial implications. Speak with your insurance provider and a financial advisor to make an informed decision that best meets your needs and goals.