How Does Term Life Insurance Work, And Does It Have Cash Value?
Term life insurance is a type of temporary life insurance that will last a specific number of years (such as 10, 20, or 30) or until you reach a certain age. When you reach the end of the policy, it terminates, leaving you uninsured. If you die while the policy is in force, the company will pay out the death benefit (how much coverage you have) to your beneficiaries.
Standard term life policies do not build cash value and thus have no cash surrender valueCash Surrender Value
The amount of money refunded to the policyowner upon cancelling (aka "surrendering") the policy. The surrender value is generally equal to the current cash value or very close to it.. You’re paying solely for death benefit protection, which is partially why it’s the cheapest type of life insurance.
The only exception to that rule is for return of premium term life policies, which refund 100% of your premiums if you’re still alive at the end of the policy. With some companies (very few), these ROP term policies do indeed build cash value.
This is the only circumstance where a term life insurance policy has cash value or would have a cash surrender value.
Which Life Insurance Policies Have Cash Value?
Keep in mind that cash value life insurance is substantially more expensive than term life coverage. That said, the kinds of life insurance that have cash value include:
- Whole life insurance
- Final expense insurance
- Return of premium term life insurance
- Traditional universal life insurance (UL)
- Indexed universal life insurance (IUL)
- Variable universal life insurance (VUL)
- Guaranteed universal life insurance (GUL)
- Variable indexed universal life insurance (VIUL)
- Single premium universal life insurance (SPUL)
Term Life Insurance Vs Whole Life Insurance Vs Universal Life Insurance
There are significant differences between term vs whole life insurance and universal life, too. Below is a breakdown of all three.
| Policy Features | Term Life Insurance | Whole Life Insurance | Universal Life Insurance |
|---|---|---|---|
| Length of coverage | Usually 10, 20 or 30 years | Forever | Forever |
| Fixed premiums | Often yes, but sometimes premiums increase over time | Yes | Yes & no |
| Affordability | Lowest cost | 2-20x more than term coverage | Always costs 2-5x more than term coverage |
| Guaranteed death benefit payout | Yes | Yes | Yes |
| Builds cash value | No | Yes | Yes |
| Cash surrender value | No | Yes | Yes |
| Policy loans | No | Yes | Yes |
| Potential payout of dividends | No | Yes | Yes |
| Medical exam required | Sometimes | Sometimes | Sometimes |
| Ideal reasons to buy | Temporary needs such as covering a mortgage or replacing income | Permanent needs such as paying for your final expenses | Permanent needs such as estate planning or supplemental income for a surviving spouse |
How Does Cash Value Life Insurance Work?
Cash value life insurance has two parts, which are the death benefit and the cash value. The death benefit is how much coverage you’re insured for (aka “face amount”). It’s the amount of money your beneficiaries would receive upon your death.
The cash value is like a behind-the-scenes savings account that grows indefinitely. With each premium you pay, a small portion is allocated to the cash value account. For most companies, it earns an average interest rate of 3-5%.
The cash value grows tax-deferred, and you’re entitled to withdraw (also commonly referred to as “borrowing from the policy” or “taking out a loan from the policy”) it at any time. That money can be used any way you’d like.
Should You Buy Life Insurance With Cash Value?
The cash value in permanent life insurance policies can be beneficial in a variety of ways. Whether or not it’s right for you depends on your needs and budget. That said, here are the unique benefits of having cash value in a permanent life insurance policy:
- Emergency funds: You can withdraw the cash value at any time and spend it however you wish. If you’re in a financial bind and have no other source of funds, your policy’s cash value could save the day.
- Living benefits: The funds in the policy can be withdrawn and used for long-term care costs, medical bills, a down payment on a house, and more.
- Supplement retirement: Many cash-value policies are designed for substantial cash value growth. Oftentimes, these policies can be used to supplement retirement since the funds accrue tax-free. Furthermore, when you withdraw funds, it’s usually not considered income, so no tax burden is created.
- Collateral for loans: If you’re trying to borrow money and the lender asks you for collateral, the cash value in your policy can be used as such.
Frequently Asked Questions
Term life insurance has no cash-out option. If you cancel a term policy, you will not get a refund. You were insured while the policy was in force. Had you died, the insurer would have had to pay out the death benefit. This is why they don’t refund the premiums you paid. The only time a term policy will give you any money back is if you have a return of premium riderReturn of Premium Rider
A rider that will refund all premiums paid at the end of the policy term. It's uncommon for insurers to offer these riders, and they will significantly increase the policy's cost.. An “ROP” rider will result in a refund of all premiums upon reaching the end of the term.
When you borrow from the cash value in a life insurance policy, it counts as a loan against it. In most cases, any outstanding policy loans will subsequently reduce the death benefit. For example, let’s say you have a $100,000 life insurance policy and you borrow $10,000 from the cash value. Upon your death, your beneficiaries would receive only $90,000. Now, you can and should aim to pay back any loans. That’s primarily because policy loans earn interest, which means they will grow over time, further reducing your death benefit.
Term life policies don’t build cash value because, by nature, they are meant only to provide death benefit protection. Since their inception hundreds of years ago, term life policies simply offered coverage on your life and nothing else. It’s also worth noting that being highly affordable is a critically important feature of term life policies. They’re built to offer high coverage at minimal cost. If you were to add cash value to the mix, the price would rise significantly.
- Nationally licensed life insurance agent with over 16 years of experience.
- Personal annual production that puts him in the top .001% out of all life insurance agents in the nation.
Anthony Martin is a nationally licensed insurance expert with over 16 years of experience and has personally served over 10,000 clients with their life insurance needs. He frequently authors entrepreneurial and life insurance content for Forbes, Inc.com, Newsweek, Kiplinger, and Entreprenuer.com. Anthony has been consulted as an expert life insurance source for dozens of high-profile websites such as Forbes, Bankrate, Reuters, Fox Business, CNBC, Investopedia, Insurance.com, Yahoo Finance, and many more.
- Nationally licensed life insurance agent with over 20 years of experience
- Best selling Amazon author.
Jeff Root is a nationally licensed life insurance expert with over 20 years of experience. He has personally helped over 3000 clients with their life insurance needs. Jeff is a best-selling Amazon author and the managing partner of a highly successful insurance brokerage that manages over 2,500 licensed insurance agents across the USA. He has been a featured life insurance source for prestigious websites such as Forbes, Bloomberg, MarketWatch, Nerdwallet, and many more.
- Nationally licensed life insurance agent with over 15 years of experience
- Best selling Amazon author of five insurance sales books.
David Duford is a nationally licensed insurance expert with over 15 years of experience. He has personally helped more than 15,000 clients buy life insurance. David has been featured as an expert source for highly authoritative publications such as A.M. Best and Insurancenewsnet. He also runs one of the largest Youtube channels to help aspiring insurance agents serve their clients better.
- Nationally licensed life insurance agent with over 20 years of experience
- Best selling Amazon author.
Jeff Root is a nationally licensed life insurance expert with over 20 years of experience. He has personally helped over 3000 clients with their life insurance needs. Jeff is a best-selling Amazon author and the managing partner of a highly successful insurance brokerage that manages over 2,500 licensed insurance agents across the USA. He has been a featured life insurance source for prestigious websites such as Forbes, Bloomberg, MarketWatch, Nerdwallet, and many more.
- Nationally licensed life insurance agent with over 15 years of experience
- Best selling Amazon author of five insurance sales books.
David Duford is a nationally licensed insurance expert with over 15 years of experience. He has personally helped more than 15,000 clients buy life insurance. David has been featured as an expert source for highly authoritative publications such as A.M. Best and Insurancenewsnet. He also runs one of the largest Youtube channels to help aspiring insurance agents serve their clients better.
