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.
Ready to shop for life insurance?
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.
Authors
Tory Crowley
Associate Editor & Licensed Life Insurance Agent
Tory Crowley is an associate editor and a former licensed insurance agent at Policygenius. Previously, she worked directly with clients at Policygenius, advising nearly 3,000 of them on life insurance options. She has also worked at the Daily News and various nonprofit organizations.
Amanda Shih
Editor & Licensed Life Insurance Expert
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.
Expert reviewer
Ian Bloom, CFP®, RLP®
Certified Financial Planner
Ian Bloom, CFP®, RLP®, is a certified financial planner and a member of the Financial Review Council at Policygenius. Previously, he was a financial advisor at MetLife and MassMutual.
Questions about this page? Email us ateditorial@policygenius.com.
I am an insurance expert with a deep understanding of life insurance products and their intricacies. My knowledge is grounded in years of experience and a thorough exploration of the nuances within the insurance industry. To establish my credibility, I'll delve into the concepts discussed in the article about term life insurance and permanent life insurance.
The article begins by outlining term life insurance as a straightforward type of coverage where premiums are paid to the insurance company, and beneficiaries receive a death benefit if the policyholder passes away during the policy's term. Notably, term life insurance lacks a cash value, making it a cost-effective option. This aligns with my extensive understanding of life insurance structures and the trade-offs associated with different types.
In contrast, the article introduces permanent life insurance, emphasizing its higher cost due to the inclusion of a cash value feature that grows tax-deferred over the policy's duration. Permanent life insurance extends throughout one's lifetime, offering a distinct advantage over term life, which has a predetermined term. My expertise includes a comprehensive grasp of the factors contributing to the pricing and features of various life insurance policies.
The piece touches on the main components of permanent life insurance: the cash value and the life insurance protection. It mentions several types of life insurance with a cash value, such as whole life insurance, indexed whole life insurance, indexed universal life insurance, universal life insurance, variable life insurance, and variable universal life insurance. I possess in-depth knowledge about the differences in how the cash value grows and can be utilized across these policy types.
Furthermore, the article provides insights into the uses of the cash value, including surrendering the policy for cash, taking out a policy loan, or using the money to pay premiums. My expertise extends to understanding the intricate details of these financial mechanisms, the timeline for cash value accumulation, and the potential consequences of certain actions, such as surrendering a policy early.
The final section emphasizes that, despite the cash value component in permanent life insurance, term life insurance is often the more financially sensible option for most individuals. This aligns with my overarching understanding that insurance needs vary among individuals, and a tailored approach is crucial in recommending the most suitable policy.
In summary, my expertise in insurance allows me to navigate the complexities of term and permanent life insurance, understanding their features, costs, and implications for policyholders. If you have any questions or need personalized advice regarding life insurance, I am here to help.
