Can You Pull Money From Term Life Insurance?

Life insurance provides a financial safeguard, offering a death benefit to designated beneficiaries upon the passing of the insured. This protection helps families cover various expenses. Life insurance comes in various types, each with distinct features and benefits.

Understanding Term Life Insurance

Term life insurance provides coverage for a specific period, known as the “term,” typically one to 30 years. This type of policy is structured to offer financial protection for a defined duration, aligning with temporary financial responsibilities such as a mortgage or the years a child is dependent. Its primary function is to pay a death benefit if the insured dies within the specified term.

Term life insurance operates purely as protection against a specific risk for a specific time. The premiums are typically lower than those for permanent life insurance policies offering the same death benefit amount. This affordability stems from its temporary nature and the absence of a savings component.

The Absence of Cash Value

A fundamental characteristic of term life insurance is that it does not accumulate a cash value. Unlike other forms of life insurance, term policies are designed solely for providing a death benefit upon the insured’s death within the policy term. There is no built-in savings or investment component.

Because term life insurance functions as temporary coverage, there is no cash value against which policyholders can borrow, withdraw, or surrender the policy for a cash payout. The premiums paid cover the cost of the death benefit for the specified term. If the insured outlives the term, the policy simply expires without any return of premiums. The only payout from a term life policy occurs if the insured passes away during the active term, at which point the beneficiaries receive the death benefit.

Life Insurance Policies with Cash Value

Permanent life insurance policies, such as whole life and universal life, include a cash value component. A portion of the premiums paid into these policies contributes to this cash value, which grows over time on a tax-deferred basis. This means that the earnings on the cash value are not subject to annual income taxes as they accumulate.

Policyholders can access the accumulated cash value in several ways while the policy is in force. One common method is taking a policy loan, where the cash value serves as collateral. These loans are generally not considered taxable income as long as the policy remains active. Another option is making withdrawals from the cash value, which are typically tax-free up to the amount of premiums paid into the policy. However, withdrawals exceeding the amount of premiums paid may be subject to income tax. Alternatively, a policyholder can surrender the policy for its cash value, which terminates the coverage, and any amount received above the premiums paid may be taxable.

Converting Term Life Insurance

Many term life insurance policies offer a “conversion privilege,” which allows the policyholder to convert their term coverage into a permanent life insurance policy, such as whole life or universal life. This conversion typically occurs without the need for a new medical examination or additional health underwriting. The premium for the new permanent policy will generally be based on the insured’s age at the time of conversion and the premium rates for the permanent policy type.

Converting a term policy provides a pathway to gaining the cash value features associated with permanent life insurance. While the premiums for the new permanent policy will be higher than the original term premiums, the converted policy will begin to accumulate cash value. This cash value can then be accessed through loans or withdrawals, offering a financial resource that was not available with the original term policy.