When you buy life insurance, you’re making a big financial commitment. It’s obviously an important one — providing a safety net for your loved ones if you die — but the cost of life insurance adds up since policies are in place for 30 years or longer. Can you ever get some of that money back? The short answer is yes, by buying a return of premium term policy, buying a permanent life insurance policy or selling your policy. There are pros and cons to all those options, though. Here's what you should know before making any life insurance decisions.
How to get money back on your term life insurance
If you have a term life insurance policy, you can make sure it’s of the return of premium variety. We have an entire primer on return of premium life insurance, but it’s basically what it sounds like: When your policy term is up, your premiums are returned to you.
You’ll usually get the entire premium back, but fees and additional rider costs aren't always included. And, because the money gets returned, life insurance companies raise the price of return of premium policies compared to standard term life insurance policies, usually at a 30% markup.
You should talk to a licensed insurance expert about whether a return of premium life insurance policy is right for you. Even if you can afford the additional cost, consider the trade-off: You’re paying more for your policy, which could go instead into an investment vehicle that nets a return rather than gaining no value over decades.
Pros of return of premium life insurance
- You get your premiums returned tax-free when the term is up
- Is valuable as a forced-savings vehicle
Cons of return of premium life insurance
- Return of premium policies cost up to 30% more than traditional life insurance
- The additional money you’re paying is missing out on interest
Consider whole life insurance
Alternatively, you can get permanent life insurance with a cash value component. For most people, this means a whole life insurance policy.
Whole life insurance's cash value component can grow over the life of the policy. Unlike other types of permanent life insurance, whole life insurance has a minimum growth rate so you always receive some cash back.
You can use whole life insurance's cash value a few ways. For instance, you can take a loan out against it or surrender the policy and collect the money. Whole life insurance is useful if you have complex financial needs that benefit from that cash value. Keep in mind, whole life insurance is considerably more expensive than term life and more confusing thanks to fees and guidelines.
Pros of whole life insurance
- Lasts your entire life instead of expiring after a certain number of years
- Cash value component can help with complex financial needs, like paying estate costs
Cons of whole life insurance
- Up to 4x as expensive as term life insurance
- You likely have better investment options available to you
Selling your life insurance policy
Finally, you can collect cash from your life insurance policy by selling it to someone else. However, this move really isn’t recommended. First of all, you won’t have your financial safety net anymore. Second, you’re unlikely to get much money for it. Third, it’s hard to find a buyer for life insurance policies. That's because they're not assuming your policy; they're buying the rights to your death benefit. Generally, individuals or companies only do that when there's a good chance they'll cash in. So, if you're young and/or healthy, you probably won't find a buyer. And if you're sick and/or older, you're giving away a death benefit your family will likely need.
In either case, we mention selling policies because it's technically an option, but you should talk to a professional if you’re considering this path.
Pros of selling your life insurance policy
- You get some money back
Cons of selling your life insurance policy
- Most buyers want a policyholder who is likely to die relatively soon
- You likely won’t get the full face value back
- Fees and taxes eat into the money you get
How to think about term life insurance
Those are your options for getting money out of your life insurance policy. But before you make a decision based on whether you can get cash back, let’s talk about mindset.
People often think of life insurance as an investment. But term life insurance at least is less like a mutual fund and more like an emergency savings account — you might collect some (very minimal) interest, but its purpose is to be readily available cash when you need it. A term life insurance policy should be part of your portfolio so your family doesn’t fall victim to debt, not to turn a profit.
On a related note, you also shouldn’t think life insurance is a waste if you never use it. After all, if you never use it, you didn’t die, so look on the bright side. Ideally, you want your life insurance policy to do absolutely nothing.