Can I cash out a term life insurance policy?

Most people understand that life insurance comes in two forms — term and permanent. Term life insurance is often the most affordable option, providing coverage for a certain number of years, while permanent life insurance provides lifelong coverage with a cash value component. 

But what happens to your policy if you decide you don’t need or want it anymore? Can I cash out a term life insurance policy like other investments? 

Unfortunately, the answer is no. Term life insurance has no cash-value component, so you can only sell or surrender your policy.

In this guide, we’ll explain why cashing out a term life insurance policy isn’t an option and discuss whether cash value vs. surrender value in term life insurance is better for you. Learn how to surrender your policy and more alternatives, including converting your policy instead of cashing out.

What is cashing out a life insurance policy?

Cashing out a life insurance policy is the process of receiving a lump sum payment from your insurer in exchange for canceling your policy. This process is sometimes referred to as surrendering life insurance, and it can provide you with quick access to cash if you’re suddenly in need of funds.

Read more:

• How to Cancel Your Life Insurance Policy 
• Can you reduce the coverage amount on your term life insurance policy?

You can’t cash out term life insurance. Term policies are built only to provide death benefits and don’t accrue cash value over time.

On the other hand, permanent life insurance provides lifelong protection and accumulates cash value. For those with permanent policies, there is an option for cashing out your life insurance. 

A portion of your premiums goes towards building up a cash value account, and you can access this account at any point in your life through loans or withdrawals. Any remaining funds will still pay a death benefit when you pass away. When you surrender your permanent policy, you can access some or all of the accumulated cash value as a lump sum payment.

However, it’s important to note that if you surrender life insurance before its maturity date (often around age 95-100), you may not receive the full amount due to unpaid premiums and fees associated with early cancellation. (For more information, read our “How To Pay For Your Term Life Insurance Policy“).

Cashing out a life insurance policy is usually done in emergency situations — especially in term policies — since it can be costly and there are often better alternatives. It is important to understand the differences between term life insurance vs. whole life insurance before making a decision about which one is right for you. 

If building up cash value and having access to those funds is important to you, then a permanent life insurance policy may be the better choice. Speak with a financial advisor to ensure that’s the right option for you.

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Do term life insurance policies have cash value?

No, term life insurance does not accrue cash value. If you cancel your term life insurance policy early, no money will be returned to you from the insurer. In fact, if you haven’t paid enough premiums into the policy by the time of cancellation, you may even owe money back to the insurer.

A term life insurance policy is designed to offer financial protection for a specified period of time, usually 10, 15, 20, or 30 years. It is designed for short-term coverage at a fixed rate and pays out a death benefit if the insured dies during the term.

It’s important to remember that once the term expires, so does your coverage and any accumulated cash value within the policy. Decide how much life insurance you need before you buy term life insurance.

The main advantage of term life is that it is typically more affordable and beneficial for those who only need temporary coverage or have budgetary concerns. If you are looking for pure protection at an affordable rate, then a term life insurance policy may be more suitable. 

Learn more about guaranteed term life insurance, where rates remain the same throughout the duration of the coverage.

How to Cash Out Term Life Insurance Through a Settlement

Cashing out a life insurance policy through a settlement is an option for those who no longer need or want life insurance coverage.

This process involves selling the death benefits of your existing policy, or the total amount of money that would be paid out upon your passing, to a third-party investor in exchange for a cash lump sum payment.

The investor then assumes ownership and responsibility of the policy and will receive any future payments associated with it. It’s important to note that this option may not be available for all types of term life insurance policies, so it’s best to consult with an experienced financial advisor before making any decisions.

Overall, cashing out a life insurance policy can be a great way to access funds during difficult financial times, but keep in mind that this option can significantly reduce the overall death benefit that would have been available if you had held onto the policy until your passing.

You should also consider other options, such as surrendering the policy to the insurance company, converting it into a paid-up policy, or exchanging it for another type of life insurance. Each option has its own benefits and drawbacks, so it’s important to understand all of your options before making a decision.

Converting Term Life Insurance

If your current insurer provides this option, you can convert your term policy into a permanent life insurance policy to accrue cash value. The process of converting a term life insurance policy is fairly simple and straightforward and usually begins when the current term of coverage ends.

To convert term life insurance, fill out an application for the type of permanent policy you’d like to obtain and pay an additional premium based on your current age and health. New life insurance rates will depend on the coverage amount you’re requesting, as well as any extra features that may be included in the policy.

Once converted, your new policy will offer lifelong protection and potentially build up cash value over time, depending on which type of permanent life insurance you choose. It’s important to remember that additional costs may be associated with converting your policy, so be sure to review all the details before making a decision.

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Case Studies: Can I Cash Out a Term Life Insurance Policy?

Case Study 1: Sarah’s Financial Emergency

Sarah, a 35-year-old working professional, purchased a term life insurance policy when she started her family. Unfortunately, she encountered a financial emergency and needed immediate funds. She considered cashing out her term life insurance policy to access money quickly.

However, Sarah learned that term life insurance policies do not have a cash value component, and cashing out was not an option for her. Instead, she explored other alternatives, such as selling the policy or converting it into a permanent life insurance policy. (For more information, read our “How to Sell Your Life Insurance Policy“).

Case Study 2: John’s Changing Needs

John, a 50-year-old business owner, had a term life insurance policy that was coming to an end. As his financial situation changed, he evaluated whether he still needed life insurance coverage. John wondered if he could cash out his term life insurance policy.

However, he discovered that term life insurance policies do not accumulate cash value. He explored other options, including converting his term policy into a permanent life insurance policy or purchasing a new policy that aligned with his current needs.

Case Study 3: Emily’s Policy Evaluation

Emily, a 40-year-old professional, reviewed her term life insurance policy and considered cashing it out. She wanted to understand her options before making a decision. Emily learned that term life insurance policies do not offer a cash value component, so cashing out was not possible.

However, she discovered that surrendering the policy or converting it into a permanent life insurance policy were potential alternatives. Emily carefully evaluated the benefits and drawbacks of each option to make an informed choice.

The Final Verdict: Can I cash out a term life insurance policy?

While you can’t cash out term life insurance, you have many different options when it comes to surrendering your policy. 

For example, some insurers allow you to convert your term life insurance policy into a permanent one without going through the medical underwriting process again. You can also sell your policy for cash to a third party or buy a new policy when your term life insurance ends. 

Overall, cashing out a term life insurance policy is an option for those who no longer need or want their coverage. Cashing out your policy can provide much-needed funds during difficult times, but it will also significantly reduce the overall death benefit that would have been available had you held onto the policy until your passing.

It’s important to understand the benefits and drawbacks of this option before making a decision. Nonetheless, with the right knowledge and guidance, cashing out a term life insurance policy could be a great way to access funds while you’re still alive.

When deciding if term life insurance is right for you, it’s important to consider how long of a period you need coverage and whether or not you can sustain premiums over that period. Term life can provide significant financial protection and peace of mind in times of need, but we recommend discussing your specific needs with an experienced financial advisor who can help guide you in making the best decision for your circumstances.

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