Can You Cash Out a Term Life Insurance Policy?

Term life insurance policies offer financial protection for a specific period, providing a death benefit to beneficiaries if the insured passes away within that term. Unlike some other forms of life insurance, term policies typically do not build cash value over time. This design means that a policyholder cannot directly “cash out” a term life insurance policy in the same way one might withdraw funds from a savings account or surrender a permanent life insurance policy for its accumulated value.

Understanding Term Life Insurance Policies

Term life insurance is designed to provide coverage for a defined period. Policyholders pay regular premiums to maintain this coverage, and if the insured dies within the specified term, the death benefit is paid to the designated beneficiaries. Because term life policies are temporary and provide only a death benefit, they do not include a savings or investment component. Premiums are calculated to cover the cost of insurance for the specified term, without allocating any portion to build cash value. This fundamental characteristic distinguishes term life insurance from permanent life insurance policies, like whole life or universal life, which are designed to accumulate cash value over the policy’s lifetime.

Accessing Value from a Term Life Policy

While a term life policy does not build cash value, there are indirect methods through which policyholders might access financial value or convert their policy into one that does. One common option is policy conversion, where some term policies allow the policyholder to convert their coverage into a permanent life insurance policy. This conversion typically occurs without requiring a new medical exam, and the new permanent policy, such as whole life or universal life, will then begin to accumulate cash value over time. Once converted, this new permanent policy’s cash value could potentially be accessed through policy loans or withdrawals, subject to the terms and conditions of the new policy.

Another way to access a portion of the policy’s benefit under specific circumstances is through accelerated death benefits, also known as living benefits riders. These riders, which may be included with the policy or added for an additional cost, allow the policyholder to receive a portion of the death benefit while still living. This provision is typically triggered by severe health conditions, such as a terminal illness with a limited life expectancy, a chronic illness requiring long-term care, or a critical illness like a heart attack or stroke. Utilizing an accelerated death benefit reduces the death benefit eventually paid to beneficiaries, and the payout is generally tax-free under current tax laws if certain conditions are met.

In some situations, policyholders may consider a life settlement, which involves selling their term life insurance policy to a third-party investor. This option is generally available to individuals who are typically over 65 years old or have a significant health impairment, and whose policy has a substantial death benefit. The investor pays a lump sum amount that is greater than the policy’s surrender value but less than the full death benefit, and then takes over premium payments, becoming the new beneficiary. This transaction allows the original policyholder to receive immediate funds, but it means they no longer control the policy or its death benefit.

Policy Expiration and Non-Renewal

When a term life insurance policy reaches the end of its specified coverage period, and if the insured is still living, the policy simply expires. At this point, the coverage ceases, and no death benefit will be paid. Because term life insurance does not accumulate cash value, no premiums are returned to the policyholder, nor is any cash value paid out upon expiration.

Policyholders often have the option to renew the policy for another term, though typically at a significantly higher premium due to increased age and potential health changes. Alternatively, they may choose to purchase a new life insurance policy, whether another term policy or a permanent one, to continue their coverage.