Can I Cash In a Term Life Insurance Policy?

Life insurance offers a death benefit to beneficiaries upon the insured’s passing. Term life insurance provides temporary coverage for a specific period. Unlike other life insurance products, term policies do not have a cash value component that policyholders can access or “cash in” during their lifetime.

Understanding Term Life Insurance

Term life insurance provides coverage for a defined period, such as 10, 20, or 30 years. It functions as pure protection, paying a death benefit to beneficiaries only if the insured dies within the policy term. Premiums are allocated solely to secure this death benefit coverage.

A term life policy has no savings or investment component, so funds do not accumulate. Once the defined term expires, coverage ends, and there is no payout or value returned to the policyholder unless the policy is renewed or converted.

Policies That Accrue Cash Value

In contrast, permanent life insurance policies include a cash value component that grows over time. Policies such as whole life and universal life insurance build this value, with a portion of each premium contributing to it on a tax-deferred basis.

Policyholders can access this accumulated cash value through several mechanisms. One method involves taking out a policy loan, using the cash value as collateral. These loans are generally not considered taxable income as long as the policy remains active, though interest accrues, often ranging from 4% to 8% annually. Another option is to make a withdrawal from the cash value, which can be tax-free up to the amount of premiums paid, but may become taxable if it exceeds this cost basis. Policyholders can also surrender the policy entirely for its accumulated cash value, which can have tax implications if the amount received exceeds the premiums paid into the policy.

Management of Term Life Policies

Since term life policies do not build cash value, their management focuses on maintaining the death benefit coverage. If premium payments cease, the policy will lapse, and coverage will terminate. During a grace period, typically 30 to 90 days, coverage generally remains in effect. However, if payment is not made, the policy ends, and no death benefit will be paid.

A policyholder can surrender a term life policy, which is equivalent to canceling it. Unlike permanent policies, surrendering a term policy does not result in any cash value being returned to the policyholder. The outcome is the cessation of premium payments and the termination of coverage.

Many term life insurance policies include a “conversion option,” allowing the policyholder to convert their term coverage into a permanent life insurance policy, such as whole life or universal life. This conversion does not require a new medical examination, even if the insured’s health has changed since the original term policy was issued. A specific timeframe exists for this privilege, such as within a certain number of years of policy issuance or before a particular age. While this action does not “cash in” the term policy, it transforms it into a policy that will begin to accrue cash value in the future, providing a path to potential cash access later. Premiums for the newly converted permanent policy will be higher due to the insured’s older age and the lifelong coverage it offers.