Can You Cash Out Term Life Insurance Before Death?

Term life insurance provides financial protection for a specific period, typically 10 to 30 years. It offers a death benefit to beneficiaries if the insured person passes away during the policy’s active term. Unlike permanent life insurance, term policies generally do not accumulate cash value and cannot be “cashed out” in the same way.

The Nature of Term Life Insurance

Term life insurance functions as pure protection for a defined duration. Policyholders pay premiums for this coverage. Premiums are typically lower than those for permanent life insurance because they do not contribute to an investment component or cash value accumulation. It is akin to renting insurance, providing coverage for a temporary need without building equity.

In contrast, permanent life insurance policies, such as whole life or universal life, provide lifelong coverage. A portion of their premiums contributes to a cash value component that grows over time on a tax-deferred basis. This accumulated cash value can be accessed by the policyholder during their lifetime through policy loans, withdrawals, or by surrendering the policy.

Accessing Policy Value Through Riders

Although term life insurance does not build cash value, certain riders can allow policyholders to access a portion of the death benefit under specific circumstances. A common rider is the “accelerated death benefit” or “living benefit” rider. This feature permits access to a percentage of the policy’s face value if the insured is diagnosed with a terminal illness, a chronic illness, or other qualifying conditions.

Accessing funds through an accelerated death benefit rider is an advance on the death benefit, not a “cashing out” of accumulated value. The funds received reduce the eventual payout to beneficiaries. For example, if a policyholder has a $200,000 policy and accesses $50,000 through this rider, the remaining death benefit for beneficiaries would be $150,000. Eligibility often requires a diagnosis of a terminal illness with a life expectancy limited to 12 or 24 months, depending on the insurer.

Policy Conversion

Many term life insurance policies include a “conversion option,” allowing the policyholder to convert their term coverage into a permanent life insurance policy. This conversion can typically be done without a new medical examination, even if the policyholder’s health has changed since the original term policy was issued. This is an advantage for individuals who may have developed health conditions that would otherwise make new permanent coverage expensive or unobtainable.

Once a term policy is converted to a permanent policy, such as whole life or universal life, the new permanent policy will begin to accumulate cash value. This cash value grows over time and can then be accessed by the policyholder. Policyholders can typically access this value through policy loans, withdrawals, or by surrendering the permanent policy for its cash surrender value. The cash value is built within the new permanent policy, not within the original term policy itself.

The conversion option often has a specific timeframe within which it must be exercised, such as within the first few years of the term policy or before a certain age. Premiums for the converted permanent policy will generally be higher than the original term premiums, reflecting lifelong coverage and the cash value component. However, securing permanent coverage regardless of current health can be a valuable financial planning tool.

Discontinuing Coverage

If a policyholder decides to discontinue their term life insurance policy, they can stop premium payments, allowing the policy to lapse, or actively surrender it. When a term life insurance policy lapses or is surrendered, there is typically no cash payout to the policyholder. The premiums paid are forfeited, and coverage ceases.

This differs significantly from permanent life insurance policies. If a permanent life insurance policy is surrendered, the policyholder generally receives its accumulated cash value, minus any applicable surrender charges and outstanding loans. Surrender charges, if present, are fees deducted by the insurer for early termination and can range from 10% to 35% of the cash value, especially in early years. Any gain from the cash value that exceeds the premiums paid into the policy may also be subject to income tax.