Can You Cash Out Term Life Insurance While Alive?

Individuals often wonder if their term life insurance policy can serve as a source of funds during their lifetime. While some life insurance policies offer living benefits, term life insurance primarily provides financial protection for a specific period. This article clarifies the nature of term life insurance and explores the limited circumstances, or alternative policy types, that allow for accessing funds while the policyholder is still alive.

Understanding Term Life Insurance and Cash Value

Term life insurance is designed to provide coverage for a defined period, such as 10, 20, or 30 years. This type of policy is generally more affordable than permanent life insurance because it focuses solely on providing temporary death benefit protection.

Term life insurance typically does not build cash value. Unlike permanent policies, premiums do not accumulate in a separate savings component, meaning there is no cash fund to directly “cash out” or borrow against.

The absence of a cash value component contributes to term life insurance’s lower premiums. Policyholders pay for pure insurance coverage, which ceases once the term expires unless renewed. If the insured outlives the policy term, there is no payout or accumulated value to retrieve.

Accessing Funds Through Policy Features

While term life insurance generally lacks cash value, some policies include features or riders allowing early access to a portion of the death benefit under specific circumstances. The Accelerated Death Benefit (ADB) rider is a common example. This rider allows a policyholder to receive an advance on their death benefit if diagnosed with a qualifying terminal, chronic, or critical illness.

A terminal illness diagnosis typically requires a life expectancy of 12 to 24 months or less, as certified by a physician. Funds received through an ADB rider are not restricted in use, allowing policyholders to cover medical expenses, care costs, or other financial needs. Accessing these funds reduces the death benefit paid to beneficiaries. The amount available can range from 25% to 100% of the death benefit, and administrative fees or interest may be charged on the advanced amount.

Converting or Selling a Term Policy

Policyholders can access value or alter coverage beyond the term’s limits through a few pathways. Many term life insurance policies offer a conversion option, allowing conversion to a permanent life insurance policy without a new medical exam. This conversion typically must occur within a specified timeframe, such as the first few years of the policy or before a certain age. Once converted, the new permanent policy begins to accumulate cash value, which can be accessed later.

Another option is to sell the term life insurance policy to a third party through a life settlement or viatical settlement. These transactions involve selling the policy for a lump sum payment that is less than the death benefit but generally more than any cash surrender value (which term policies typically do not have). A viatical settlement is specifically for individuals with a terminal illness, often with a life expectancy of two years or less, and proceeds may be tax-free.

In contrast, a life settlement is typically available to older individuals, often over 65, who may not be terminally ill but no longer need or can afford their policy. The payout from a life settlement is usually a smaller percentage of the death benefit compared to a viatical settlement, and the proceeds may be subject to taxation. In both settlement types, the buyer takes over premium payments and receives the death benefit when the insured dies.

How Permanent Life Insurance Offers Cash Access

Permanent life insurance policies, such as whole life and universal life, remain in force for the insured’s entire life and include a cash value component. A portion of each premium payment contributes to this cash value, which grows over time on a tax-deferred basis. This accumulated cash value can be accessed by the policyholder during their lifetime.

One method of accessing cash value is through a policy loan, where the policyholder borrows money from the insurer using the cash value as collateral. These loans typically do not require credit checks and often have lower interest rates than conventional loans, though interest accrues and any unpaid loan balance reduces the death benefit. Policyholders can also make withdrawals from the cash value, which directly reduces both the cash value and the death benefit. Withdrawals up to the amount of premiums paid into the policy are generally tax-free.

A third option is to surrender the policy, which means canceling the coverage and receiving the cash surrender value. This value is the accumulated cash value minus any applicable surrender fees, which can be substantial, especially in early years. Surrendering the policy terminates coverage, meaning no death benefit will be paid to beneficiaries.