Can You Surrender a Term Life Insurance Policy?

Term life insurance provides financial protection for a specific period, known as the “term.” This type of policy is designed to pay a death benefit to your beneficiaries if you pass away within that defined timeframe. The primary purpose of term life insurance is to offer a safety net, ensuring that your loved ones receive financial support during years when they are most dependent on your income, such as while raising children or paying off a mortgage.

The Nature of Term Life Insurance

Term life insurance policies function differently from permanent life insurance policies regarding surrender. Unlike permanent life insurance, which includes a cash value component that grows over time and can be surrendered for a payout, term life insurance does not build cash value. Your premium payments for a term policy solely cover the cost of the death benefit for the specified term.

This fundamental difference means you cannot surrender a term life insurance policy for a cash payout like you can a permanent policy. Term policies are structured to provide pure death benefit coverage without an investment or savings element. When you pay premiums for a term policy, you are essentially purchasing coverage for a set duration, and those premiums do not accumulate a reserve that can be withdrawn or borrowed against. Permanent life insurance policies, conversely, allocate a portion of your premium to a cash value account, which can be accessed through withdrawals or loans, or received as a surrender value if the policy is terminated.

What Happens if You Stop Paying Premiums

Since term life policies do not have a cash value to surrender, discontinuing premium payments will cause the policy to eventually lapse. When a premium payment is missed, insurance companies typically provide a grace period, which usually ranges from 30 to 61 days, during which the policy remains in force. This grace period allows the policyholder to make the overdue payment without losing coverage.

If the premium is not paid by the end of the grace period, the policy will terminate, and coverage will cease. Furthermore, any premiums previously paid for the term life policy are not refunded once the policy lapses. The purpose of the premiums was to provide coverage during the period they were paid, and that coverage ends when payments stop.

Options for Ending Coverage Early

Since a term life insurance policy does not offer a cash surrender value, ending coverage early is straightforward. One common approach is simply to stop paying the scheduled premiums. After the grace period expires, the policy will lapse, and the coverage will end without any further obligation.

Another method is to formally notify the insurance company of your intent to cancel the policy. This can be done by contacting customer service, sending a written request, or completing a cancellation form provided by the insurer. In either scenario, you will not receive any cash payout or refund of premiums paid, as term policies do not accumulate cash value. Some term policies may offer an option to convert to a permanent life insurance policy, which would involve transitioning to a new type of policy with different terms and potentially higher premiums, rather than surrendering the existing term policy for cash. This conversion option allows continued coverage without a new medical exam, but it is a change in policy type, not a cash surrender of the original term policy.