Short answer: Term life insurance does not have a cash value. Only permanent life insurance policies have a cash value component.
Let’s look closer at the difference between term life insurance and permanent life insurance, also called cash value life insurance.
One difference is that term life insurance is a specific product, while permanent life insurance describes an entire category of life insurance products. Whole life insurance is the most common permanent life insurance product available, but there’s also variable life insurance, universal life insurance, and the confusingly named variable universal life insurance.
Essentially, cash value life insurance products are made up of two components: the cash value, of course, and a term life insurance product. Yes, you heard that correctly! Cash value life insurance actually has a term life insurance policy thrown in there for good measure.
How does all that work? Well, let’s say you buy a whole life insurance policy for $500,000. At the very beginning of your policy’s lifespan, it has two components: a $500,000 term life insurance policy and a $0 cash value. Over time, you’ll pay monthly premiums, some of which will go into the cash value. As the cash value grows, the benefit from the term life insurance policy will decrease. Let’s say you’re fifteen years into the lifespan of your policy. At that point, you might have put $50,000 into the cash value of your policy. In the event that you die, your death benefit will consist of the $50,000 from your cash value and $450,000 from your term life insurance policy. At some point in the future, your cash value will reach your original policy amount, and the term life component will be eliminated from your policy.
Term life insurance is a "purer" form of life insurance because it doesn’t mess with all of that cash value stuff. Instead, you just pay your premiums for the life of your policy, and if you don’t die, the policy ends at the end of your term. Term life insurance is simpler to understand and usually much less expensive than a comparable permanent life insurance policy, which is why term life insurance is often the better choice for the majority of consumers.
However, because term life insurance doesn’t have a cash value, that does mean you can’t do some fun things that owners of permanent life insurance policies can do, like borrow against your life insurance policy. On the other hand, many owners of permanent life insurance policies can’t afford them, and end up surrendering the policy (and the cash value) prematurely.
If a permanent life insurance policy doesn’t make sense for your personal financial situation, don’t be tempted by promises of growth in the future or the ability to borrow against the value – often, other types of investments are smarter in the long run. At the end of the day, it makes more sense to buy the type of insurance that’s affordable and fits your family’s needs.
Image: Tax Credits