Can You Take Money Out of a Term Life Insurance Policy?

Life insurance serves as a financial safeguard, offering a death benefit to designated beneficiaries upon the policyholder’s passing. Among the various types, term life insurance is a temporary form of coverage designed to provide protection for a specific duration, such as 10, 20, or 30 years. It functions as a contract where premiums are paid for a set period, and if the insured dies within that term, a payout is made. A common question arises regarding the ability to withdraw money from these policies while the insured is still living. This inquiry often stems from a misunderstanding of how term life insurance is structured and its primary purpose.

Understanding Term Life Insurance

Term life insurance is characterized by its pure protection nature. Premiums paid for a term life policy are solely allocated to cover the cost of insurance for the specified term, ensuring a death benefit for beneficiaries if the insured passes away during that period. This type of policy does not accumulate a cash value component, which means there is no savings or investment element within the policy from which funds can be withdrawn or borrowed. Its temporary duration and straightforward structure contribute to its affordability compared to other life insurance options. Consequently, policyholders cannot “take money out” of a term life insurance policy because such a mechanism does not exist within its design.

Distinguishing from Cash Value Life Insurance

The confusion about accessing funds often arises from the existence of different types of life insurance policies. Unlike term life insurance, permanent life insurance policies, such as whole life, universal life, and variable universal life, include a cash value component. This cash value is a portion of the premium payments that accumulates over time, separate from the death benefit. It grows on a tax-deferred basis, meaning any earnings on the cash value are not taxed until they are withdrawn. This savings element provides a living benefit that is not present in term life policies.

Accessing Funds from Cash Value Policies

For policies that possess a cash value component, several methods allow policyholders to access these accumulated funds.

Policy Loan

Policyholders can borrow against the cash value, with the policy’s cash value serving as collateral for the loan. These loans do not require a credit check, and interest accrues on the borrowed amount. If the loan is not repaid, the outstanding balance, including any accrued interest, will reduce the death benefit paid to beneficiaries.

Direct Withdrawal

Another option is to make a direct withdrawal from the policy’s cash value. Unlike a loan, a withdrawal permanently reduces the cash value and, consequently, the policy’s death benefit. Withdrawals are tax-free up to the amount of premiums paid into the policy, which is considered the cost basis. However, any amount withdrawn that exceeds the premiums paid is subject to income tax.

Policy Surrender

A third method involves surrendering the policy, which means terminating the coverage entirely in exchange for its cash surrender value. The cash surrender value is the accumulated cash value minus any surrender charges, outstanding loans, or fees. Once a policy is surrendered, coverage ceases, and beneficiaries will not receive a death benefit.

Managing Your Term Life Policy

Since term life insurance policies do not offer cash value access, policyholders manage them differently. When the specified term ends, coverage expires, and no death benefit is paid if the insured outlives the term. The policyholder can choose to let the coverage lapse, or explore other options for continued protection.

Some term life policies include a “conversion privilege,” which allows the policyholder to convert their term policy into a permanent life insurance policy without needing a new medical exam. This can be a valuable option if health has declined. Converting to a permanent policy will result in higher premiums, but it provides lifelong coverage and begins to build cash value.

Policyholders can also choose to cancel a term life policy before its term ends. This involves notifying the insurer or stopping premium payments. Because term life policies do not have cash value, canceling one does not result in a refund of premiums paid, and coverage terminates.