Rebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.
Amanda Shih is a licensed life, disability, and health insurance expert and a former editor at Policygenius, where she covered life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.
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 surrender value.
Alternatively, permanent life insurance lasts for life. Permanent life insurance is pricier than term life insurance in part because they have a cash value feature that grows tax-deferred over the life of the policy.
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.
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.
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.)
How cash value life insurance works
Permanent life insurance policies have two main components: the cash value and the life insurance protection. Eventually, the cash value can be used for a loan, to pay your premiums, or cashed out.
There are several types of life insurance with a cash value, including:
The differences between these cash value policies come from how the cash value grows and how it can be used.
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, 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 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.
No, term life insurance has no cash value to cash in. Only permanent life insurance policies have a cash value, which makes them five to 15 times more expensive.
Should I get a life insurance policy with a cash value?
Because of the high cost, cash value life insurance isn't usually the best choice. Cash value can benefit people who need permanent life insurance for other reasons or high-earners who have maxed out 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.
Rebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.
Amanda Shih is a licensed life, disability, and health insurance expert and a former editor at Policygenius, where she covered life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.
