Can You Cash Out a Term Life Policy?

Life insurance provides a death benefit to beneficiaries upon the insured’s passing. Term life insurance is often chosen for its affordability and straightforward nature. A common question is whether a term life policy can be “cashed out.” Term life insurance policies do not build cash value, meaning they cannot be cashed out like permanent life insurance.

What is Term Life Insurance

Term life insurance provides coverage for a specific period, known as the “term,” which can range from one to 30 years. During this defined period, if the insured individual dies, the policy pays a death benefit to the named beneficiaries. The primary function of term life insurance is to offer financial protection for a temporary need, such as covering a mortgage, providing for dependents until they are self-sufficient, or managing other significant financial obligations.

Unlike permanent life insurance policies, such as whole life or universal life insurance, term life policies do not accumulate cash value. Premiums paid for term life insurance cover the cost of the death benefit for the specified term, without any investment or savings component. This makes term life insurance more cost-effective than permanent policies for the same amount of coverage. The absence of a cash value means that the policyholder cannot withdraw funds or borrow against the policy.

Options When a Term Policy Expires or is No Longer Needed

When a term life insurance policy reaches the end of its specified term, the coverage ceases, and the policyholder receives no payout. Term policies are designed to provide coverage for a defined period, and premiums are paid solely for that death benefit protection. If the policyholder stops paying premiums before the term ends, the policy will lapse, resulting in the termination of coverage without any return of premiums.

Policyholders cannot get back the premiums paid into a term life policy once it expires or lapses. An exception exists with a “return of premium” rider, an optional add-on that allows for a refund of premiums if the insured outlives the policy term, though this significantly increases premium costs. While some term policies may offer renewal options, these come with substantially higher premiums due to the insured’s increased age and potential health changes.

Converting Your Term Policy to Permanent Coverage

Many term life insurance policies include a feature, a conversion privilege, which allows the policyholder to convert all or a portion of their term coverage into a permanent life insurance policy. This conversion can often be done without a new medical exam, which is an advantage if the insured’s health has declined since the original term policy was issued. This option ensures continued coverage.

By converting, the policy transitions into permanent insurance, such as whole life or universal life, which accumulates cash value over time. A portion of the premiums paid into the new permanent policy contributes to this cash value, which grows on a tax-deferred basis. This accumulated cash value can be accessed by the policyholder through withdrawals or loans, providing a financial resource during their lifetime. While this is not “cashing out” the original term policy, it provides a pathway to a new policy that offers a cash value component.