Can You Get Money From Term Life Insurance?

Term life insurance provides financial protection for a specific period, offering a death benefit to beneficiaries if the insured passes away within that timeframe.

Understanding Term Life Insurance

Term life insurance is a contract between a policyholder and an insurer, providing coverage for a defined number of years, typically ranging from 10 to 30 years. It delivers a death benefit to named beneficiaries if the insured dies within the specified policy term. This financial payout helps loved ones cover various expenses, such as mortgage payments, education costs, or daily living expenses.

Term life insurance does not accumulate cash value. Unlike permanent life insurance policies, such as whole life or universal life, term policies do not have an investment component from which the policyholder can borrow or withdraw funds. The premiums paid for term life insurance are solely for the cost of the death benefit coverage during the chosen term, making it a cost-effective option for individuals seeking straightforward coverage for a particular period, without the added complexities or higher costs associated with cash value accumulation.

Accessing Funds While the Insured is Living

While term life insurance does not build cash value, a policyholder may access funds during their lifetime under specific circumstances. One method is through Accelerated Death Benefits (ADBs), also known as living benefits or terminal illness riders. ADBs allow a policyholder to receive a portion of the death benefit early if they are diagnosed with a terminal condition. The amount accessible usually ranges from 25% to 100% of the death benefit, and this early payout reduces the amount eventually paid to beneficiaries. These funds can be used for medical expenses, long-term care, or other financial needs.

Beyond terminal illness, other living benefit riders may offer access to funds. Critical illness riders provide a lump-sum payment upon diagnosis of severe conditions like a heart attack, stroke, or cancer. Chronic illness riders allow access to a portion of the death benefit if the policyholder cannot perform Activities of Daily Living (ADLs), such as bathing or dressing, due to a chronic illness. Long-term care riders provide monthly benefits to help cover costs if the insured requires long-term care due to chronic illness or cognitive impairment. These riders are often included in policies or can be added for an additional premium.

Another way to access funds is by converting a term life policy to a permanent life insurance policy, if the term policy includes a conversion option. This conversion allows the policyholder to switch to a whole life or universal life policy without undergoing a new medical exam. Once converted, the new permanent policy begins to accumulate cash value, which grows on a tax-deferred basis. The policyholder can then access this accumulated cash value through policy loans or withdrawals. This access to cash value comes from the converted permanent policy, not the original term policy itself.

Beneficiary Payouts

The primary method for receiving money from a term life insurance policy is through the death benefit paid to the designated beneficiaries upon the insured’s death, provided it occurs within the policy’s active term. When an insured individual passes away, beneficiaries must initiate a claim with the insurance company. This process typically involves notifying the insurer and submitting specific documentation to verify the death and the beneficiary’s identity.

Required documents usually include a certified copy of the death certificate and the insurer’s specific claim form. Beneficiaries may also need to provide personal identification and the policy number to expedite the process. Once the necessary paperwork is submitted and verified, the death benefit is generally paid out as a lump sum, though other payout options like installments may be available depending on the policy. The death benefit proceeds received by beneficiaries are typically income tax-free. The timeline for receiving a payout can vary, but many claims are processed within a few weeks to a couple of months.

Policy Expiration and Renewal

If an insured individual outlives the term of their life insurance policy and no living benefits have been claimed, the policy simply expires. In this scenario, no funds are paid out to the policyholder, as the coverage ceases at the end of the specified term. This is a fundamental characteristic of term life insurance, differentiating it from permanent policies that offer lifelong coverage.

Upon expiration, policyholders have several options if they still require coverage. One option is to renew the existing policy, though premiums will typically be significantly higher due to the insured’s increased age and potentially changed health status. Another possibility is to purchase a new term life insurance policy, which may be more affordable than renewing an older one if the individual is still in good health. Additionally, if the original term policy included a conversion privilege, the policyholder could convert it to a permanent life insurance policy, as discussed previously, to secure lifelong coverage.