More on Life Insurance
Q
Does term life insurance have a cash value?
A
Term life insurance does not have a cash value like some permanent life insurance policies, but it’s the most affordable option.
Updated October 9, 2020
Term life insurance is a pretty straightforward form 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. If you don’t die during the policy term and the policy term expires, or if you cancel the policy, there is no refund or surrender value for term life insurance.
Alternatively, permanent life insurance, also called cash value life insurance, is an entire category of life insurance plans that last as long as you pay the premiums. Permanent life insurance is pricier than term life insurance, but permanent policies have a cash value component that acts like an investment or savings account and grows tax-deferred over the life of the policy.
Added cash value might sound appealing – and it is, for certain situations. But for the average person, a permanent life insurance policy – even with the added cash value – doesn’t make financial sense. 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.
KEY TAKEAWAYS
Only permanent life insurance policies have a cash value, which can be used to take out a loan, surrendered for cash, or used to pay premiums
Because term life insurance policies do not have a cash value, they are about five - 15 times less expensive than permanent policies that have a cash value component
Even without a cash value, term life insurance is the best option for most shoppers
How cash value life insurance works
Cash value life insurance policies are made up of two components: a cash value component and a permanent life insurance component.
There are several types, including:
The differences in these cash value policies come from how the cash value grows and how it can be used.
| WHOLE LIFE INSURANCE | UNIVERSAL LIFE INSURANCE | INDEXED UNIVERSAL LIFE INSURANCE | VARIABLE UNIVERSAL LIFE INSURANCE | VARIABLE LIFE INSURANCE | |
|---|---|---|---|---|---|
| Duration | Life | Life | Life | Life | Life |
| Guaranteed Death Benefit? | Yes | Yes (but you can choose to adjust) | Yes | Yes | Yes |
| Guaranteed Cash Value? | Yes | Protected from risk, but can be depleted to pay premiums | Protected from risk, but can be depleted to pay premiums | Protected from risk, but can be depleted to pay premiums | No |
| How Cash Grows (or Shrinks) | Earns interest at a predetermined fixed rate | Variable rate based on performance of underlying factors | Interest rate based on the performance of the stock market index, such as the S&P 500 | Sub-accounts (pool of investor funds offered by insurer) | Sub-accounts (pool of investor funds offered by insurer) |
| Premiums | Level | Varies, up to the policyholder(subject to federal tax laws) | Varies, up to the policyholder(subject to federal tax laws) | Varies, up to the policyholder(subject to federal tax laws) | Level |
| Investment Risk | Not riskier than other permanent types, but there may be better investment options | The credited rate changes each year based on that performance | Financial risk is minimal if the market falls, but earnings are capped. Limited returns could cause the policy to lapse | Limited returns could eat into your premiums and cause the policy to lapse | Risk of holding expensive insurance policy with little to no cash value |
Methodology: Information based on policies offered by Policygenius in 2020.
What can you do with a cash value policy?
The value of a cash value policy is in what you can do with it once the cash value reaches a certain amount. Note: it takes a long time to build up the cash value. Most of the growth happens when you’ve had the policy for two or three decades, so 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.
Once you've accumulated enough cash value, you can:
Take out a policy loan.
Usually, you'll get lower interest rates than other types of loans against the cash value. But keep in mind that if you die before your loans are repaid (or if your policy lapses and you have an outstanding loan), the unpaid loan will be subject to tax.
Use the cash value to pay premiums.
This can be a great way to avoid an unwanted policy surrender due to unpaid premiums, but usually you can only do this after at least one year of owning the policy. If you deplete the entirety of the cash value to pay your premiums, however, your policy will lapse.
Surrender the policy and withdraw the cash if you no longer need life insurance.
A few caveats: if you surrender the policy, any cash profit you've made is subject to tax. And doing so during the first two to three years may mean you don't get any of the cash value or paying high administrative fees.
→ Read more about the types of cash value policies and how the cash value can be used.
Compare the market, right here.
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Why term life insurance doesn’t have a cash value
Term life insurance is pure insurance. You just pay your premiums for the term of your policy, and if you don’t die, the policy ends when your term ends and you are no longer covered.
According to Policygenius quotes, term life insurance is five to 15 times less expensive than a comparable permanent life insurance policy. Term life insurance is also more straightforward than permanent life insurance and covers you while you’re most likely to have financial dependents or outstanding debt, making it the better choice for the majority of consumers.
But the simplicity and relatively affordable rates of term life insurance mean that there are things you can’t do with it. 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 (though you may be able to use a policy as collateral for a loan through a process called collateral assignment, which we do not recommend due to the potential interest and taxes it can incur.)
Ultimately, term life insurance is the best product for most people. A licensed independent agent can help you determine if a term life insurance or cash value life insurance policy is better suited for your coverage needs.
Term life insurance cash value FAQs
What is the cash surrender value of a term life insurance policy?
There is none. Only permanent life insurance policies have a cash value, which makes them five to 15 times more expensive than term life insurance.
Should I get a life insurance policy with a cash value?
Because of cash value life insurance policies’ high cost, they’re usually not the best choice when it comes to life insurance. However, cash value could be a good policy option for you if you need a permanent life insurance policy for other reasons, or if you’re a high net-worth individual who maxed out other investment vehicles.
What is the cash value of a life insurance policy?
The cash value of a life insurance policy works like an investment or savings account and grows tax-deferred over the life of the policy. You can take out a loan against the cash value, surrender your policy for the cash, or use it to pay your premiums once it reaches a certain amount.
Rebecca Shoenthal
Life Insurance Expert
Expertise
Rebecca Shoenthal is a life insurance editor at Policygenius in New York City, specializing in buying life insurance and the ins and outs of life insurance ownership. She's edited business books by the country’s top academics, politicians, journalists, thought leaders and CEOs, including venture capitalist John Doerr’s Measure What Matters, entrepreneur Scott Belsky's The Messy Middle, NYU Stern professor Scott Galloway's The Four, and technologist John Maeda's How to Speak Machine.
Education
Rebecca has a B.A. in Media and Journalism from the University of North Carolina at Chapel Hill.
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