Term life insurance is one of the most straightforward types of life insurance. You pay premiums to the insurance company, and if you die during the policy’s term, your beneficiaries receive a death benefit.
Term life insurance has no cash value, so if you outlive or cancel your policy, there’s no refund or cash surrender value.
Alternatively, permanent life insurance does have a cash value. Permanent life insurance is pricier than term life insurance in part because it has a cash value feature that grows tax-deferred over the life of the policy.
Permanent life insurance also lasts the rest of your life, rather than a set number of years or "term".
A permanent life insurance policy — even with the cash value — doesn’t make financial sense for most people. You can usually get the financial protection you need for your family and save more money in the long run with a term life policy.
Why doesn’t term life insurance have a cash value?
Term life insurance is the simplest form of life insurance. You only pay premiums for the term of your policy, and if you don’t die, the policy eventually expires.
While term life insurance offers simplicity and affordability, there are limitations. Because it has no cash value, there is no surrender value to the policy. You also can’t take a loan out from your term policy.
How does cash value life insurance work?
Permanent life insurance policies have two main components: the cash value and the life insurance protection — the money your loved ones would get if you died. Eventually, the cash value can be used for a loan, for premium payments, or for a cash withdrawal.
There are several types of life insurance with a cash value, including:
The differences between these permanent policies come from how the cash value grows and how it can be used. Speaking with a licensed financial advisor is the best way to determine if a permanent life insurance policy is a good option for you, and if so, which type.
What can you do with the cash value?
It takes a long time to build up a policy’s cash value. The greatest interest growth happens once you’ve had the policy for two or three decades.
If you surrender the policy within the first 10 years, it’s unlikely that your cash value will be greater than the total premiums you have paid into it.
Once you’ve accumulated enough cash value, you can:
Surrender the policy for cash: After you cash out your policy, your coverage ends. The profit is taxable and you’ll need to pay administrative and/or surrender fees.
Take out a policy loan: Life insurance loans use your cash value as collateral. But if you don’t repay your loan, your policy could lapse or the unpaid amount is deducted from the death benefit when you die.
Use the money to pay premiums: Usually, this is only an option once you’ve had a policy for at least one year, and can help offset the high costs of permanent insurance. But if your cash value runs out and you don’t pay your premiums, your policy will lapse.
Ultimately, term life insurance is the best product for most people, even though it doesn’t come with a cash value component. A Policygenius agent can help you determine if a term life insurance or permanent life insurance policy is better for your needs.
Frequently asked questions
Can you cash in on a term life insurance policy?
No, term life insurance has no cash value to withdraw. Only permanent life insurance policies can accumulate a cash value.
Should I get a life insurance policy with a cash value?
Because of the high cost, cash value life insurance isn’t a good option for most people. Cash value policies can benefit people who need permanent life insurance for other reasons or high-earners who have maximized all other investment options.
Can term life insurance be surrendered?
You can cancel your term life insurance without penalty at any time, but you won’t get cash back like you would from a permanent life insurance policy.