Do Term Life Insurance Policies Have Cash Value?
Key Takeaway
When considering life insurance options, it’s important to understand that term life insurance policies typically do not build cash value—they provide a death benefit for a set term, such as 10, 20, or 30 years. On the other hand, cash value life insurance, such as whole life or universal life, may allow you to accumulate savings within the policy, which you may be able to access while you’re still living. If your primary goal is affordable protection for a specific period, term life insurance could be a good fit. However, if you’re looking for lifelong coverage with a potential savings component, a cash value policy may be worth considering.
What is Term Life Insurance?
Term life insurance is a temporary contract between you and a life insurance company. It provides coverage for a set period, often 10, 20, or 30 years, and pays a death benefit to your beneficiaries if you pass away during that term.
Unlike permanent life insurance, which offers lifelong coverage and includes a savings feature known as cash value, term life insurance policies typically do not accumulate any cash value. This lack of a cash component is one reason why term life insurance is often more affordable than other life insurance options.
Key Features of Term Life Insurance:
- Fixed Time Period: Coverage lasts for a specific term (e.g., 10, 20, or 30 years).
- Death Benefit: Pays out a death benefit if you pass away during the policy term.
- Lower Cost: Term life insurance is typically less expensive than whole life or other permanent policies.
- No Cash Value: Unlike permanent life insurance policies, term life generally does not accumulate cash value.
What Happens When the Term Ends?
When your term life insurance policy expires, you may have several options:
- Renew the policy: You may be able to renew it, though premiums typically increase.
- Convert to permanent life insurance: Some policies allow you to switch to whole life insurance or universal life insurance without a medical exam, depending on the terms of the policy.
- Get a new policy: You could apply for a new term policy, though age and health factors may affect the cost.
Does Term Life Insurance Have Cash Value?
No, term life insurance policies generally do not have cash value. These policies provide a death benefit if you pass away during the term but typically do not include a savings or investment component. The absence of cash value may be one reason why term life insurance premiums are lower than those of whole life insurance or other permanent life insurance policies.
What is Cash Value Life Insurance?
Cash value life insurance is a type of permanent life insurance that includes a savings component in addition to the death benefit. This means part of your premium payments may go into a cash value account, which has the potential to grow over time. Depending on the type of permanent life insurance, you may be able to access this cash value through loans, withdrawals, or by surrendering the policy.
Types of cash value life insurance include:
- Whole life insurance
- Universal life insurance
- Indexed universal life insurance
- Variable universal life insurance
Key Features of Cash Value Life Insurance:
- Lifelong Coverage: The policy remains active as long as premiums are paid.
- Cash Value Growth: A portion of your premiums is invested and may grow over time.
- Flexible Premiums: Some policies, such as universal life, may allow you to adjust your premium payments.
- Investment Options: With certain policies, like variable universal life, you may be able to invest the cash value in sub-accounts that function similarly to mutual funds.
Comparison of Term Life Insurance vs. Cash Value Life Insurance
Feature Length of Coverage Term Life Insurance 10, 20, or 30 years (set term) Cash Value Life Insurance Lifetime (as long as premiums are paid) |
Feature Premiums Term Life Insurance Lower, usually fixed for the term Cash Value Life Insurance Higher, with options to adjust payments over time |
Feature Death Benefit Term Life Insurance Yes, if death occurs during the policy term Cash Value Life Insurance Yes, typically guaranteed for life |
Feature Cash Value Term Life Insurance No Cash Value Life Insurance Yes, may grow over time |
Feature Policy Flexibility Term Life Insurance Fixed coverage and premiums Cash Value Life Insurance Flexibility to adjust premiums or access cash value |
Feature Renewal Options Term Life Insurance May renew at higher rates, or convert to permanent Cash Value Life Insurance Permanent, no renewal needed |
Types of Cash Value Life Insurance
- Whole Life Insurance: Offers fixed premiums and a guaranteed death benefit. The cash value typically grows at a set rate and may be accessed through withdrawals or loans during your lifetime.
- Universal Life Insurance: Provides flexibility in premium payments and death benefits. The cash value account may grow based on the insurer’s interest rate, and you may be able to raise or lower your payments.
- Indexed Universal Life Insurance: Tied to the performance of market indexes such as the S&P 500, this type of policy may offer higher returns, though gains are often capped. There is generally a guaranteed minimum interest rate.
- Variable Universal Life Insurance: This policy allows you to invest the cash value in sub-accounts similar to mutual funds. The returns depend on market performance, so the cash value can increase or decrease.
Why Choose Term Life Insurance?
Term life insurance can be a suitable option if you need coverage for a specific period and want to keep costs lower. Here are some potential benefits:
The Pros of Term Life Insurance:
- Affordability: It is often the most cost-effective option for many people. Without a savings component, premiums are typically lower.
- Simple and Straightforward: Pay a fixed premium for a set time, and your beneficiaries may receive a death benefit if you pass away during the term.
- Ideal for Temporary Needs: It may be a good option for covering specific periods, such as while raising children or paying off a mortgage.
The Cons of Term Life Insurance:
- No Cash Value: If building wealth or having a savings component is important to you, term life insurance may not be the best fit.
- Coverage Expires: Once the term ends, you may need to renew or convert the policy to maintain coverage, which can lead to higher premiums.
Should You Get Life Insurance with Cash Value?
Cash value life insurance may make sense if you're looking for long-term coverage and want the potential to accumulate savings over time. Here are some reasons to consider a cash value policy:
- Building Wealth: Cash value typically grows over time and may be used for various financial goals.
- Lifelong Coverage: Permanent life insurance policies generally provide a death benefit for life, so your beneficiary may receive the death benefit no matter when you pass away.
- Tax Benefits: Cash value may grow tax-deferred, offering potential tax savings.
- Flexible Financial Planning: You may be able to access the cash value through loans or withdrawals during your lifetime, though it’s important to understand the terms and potential impacts on the policy.
Frequently Asked Questions - Do Term Life Insurance Policies Have Cash Value?
Do Term Life Insurance Policies Have Cash Value?
No, term life insurance policies generally do not have cash value. They are designed to provide a death benefit during the policy’s term without accumulating savings.
What types of life insurance offer cash value?
Whole life insurance, universal life insurance, indexed universal life insurance, and variable universal life insurance may offer a cash value component.
Can I convert a term life insurance policy to a whole life policy?
Yes, many policies offer convertibility, allowing you to switch to a whole life or universal life insurance policy without needing a new medical exam, depending on the terms of the policy.
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This article was generated with the help of artificial intelligence (AI). AI-generated content may occasionally contain errors or misleading information. The information above is for educational use only and does not represent insurance, tax, or legal advice. It is not a recommendation or solicitation to buy insurance. Please talk to your licensed insurance agent for more information about life insurance and your needs. Please consult with the appropriate professional for tax or legal advice. Guarantees are backed by the claims-paying ability of the issuing insurance company.
Article Author: Meredith Bell
Author Bio: Meredith joined Everly in 2022 and has 20+ years of experience in the life insurance industry. She has held various roles in advertising, marketing, communications, sales and distribution support, and product development. Outside of the office, Meredith lives with her daughter Kennedy and their dog Mavis. Meredith enjoys cooking, camping, gardening, hiking, and bourbon (though not always at the same time). She is a live music enthusiast and an avid reader. Her favorite quote is by Thomas Jefferson: "I cannot live without books." Meredith agrees, but would add cheese, movies, and dogs to that list.