Does Term Life Insurance Have Cash Value?

Life insurance can give you and your family peace of mind, but seeking out a policy can also bring up a lot of questions — what term length, type of policy, and coverage amount do you need? 

And does term life insurance have cash value? 

Unlike permanent life insurance policies, term life insurance does not have a cash value component because there’s no “savings account” attached to it — you can’t borrow against your term life policy, and you won’t accumulate funds over time. For a better understanding of life insurance policies, we’ve put together this guide explaining term life insurance, cash values, and how to choose which term policy might be best for your needs. 

What is term life insurance? 

Term life insurance yields a death benefit for your beneficiaries if you were to die within a predefined term — it expires after that time, at which point you can either renew, allow it to lapse, or switch over to a permanent policy. It acts as a safety net for your loved ones if you’re no longer around to earn and provide for them and can help generate funds for college tuition, paying off a mortgage, covering end-of-life medical expenses, and more. 

Typically, term life insurance is a popular choice for those that want to ensure financial security should the insured person pass away. 

Taking out this type of policy will start with two main questions:

• How much life insurance coverage do you think your beneficiaries will need?
• How long do you want the policy term to be?

Once you determine those specifics, the cost of the insurance premium stays the same each year for the entire life of the policy. You can usually renew the policy if you’ve outlived the term period, but you may have to pay a higher rate for the years following your renewal, or the term insurance provider could refuse if your health has declined substantially or circumstances have drastically changed. 

How does term life insurance work?

Each term life insurance policy will differ slightly. Typically, premiums are determined by the insurance company based on the policy’s value and details about the policyholder, such as:

• Age
• Overall health 
• Gender

You might be required to schedule a medical exam to check for any underlying health issues, which can affect the policy amount. Plus, depending on the insurance company, you might also be asked questions regarding your:

• Current medications
• Driving record
• Smoking history
• Family health history
• Current occupation
• Travel plans
• Activities, sports, and hobbies

If you’re still alive when the policy expires, there won’t be any payout. If you pass away within the policy term length, then the insurance company pays out the face value to the beneficiaries that are included in your policy. In most cases, this cash benefit isn’t taxable, which eases the financial burden on your family at the time of your death.

What value does term life insurance have?

Term life insurance policies differ from permanent ones in that the only value it has is the guaranteed death benefit. There is no savings component or cash value associated with it, which is one primary asset of permanent life insurance. (For more information, read our “Is life insurance considered an asset?“).

However, its lack of cash value also makes it a relatively simple and affordable form of life insurance. Policyholders pay a fixed recurring cost for their beneficiaries to receive a pay out at the time of their death — money in, money out.

Permanent and other forms of life insurance are considerably more complicated, due to the accrued savings and potential to borrow against the policy. (For more information, read our “How and When to Borrow Against a Life Insurance Policy“).

So, what can you do if you want a policy with cash value instead?

Converting to a Permanent Policy with Cash Value

If you take out term life insurance but later want a new policy with cash value insurance, what are your options? Are you stuck with your current policy? Do you have to start from scratch? 

Not necessarily.

You’ll have to check with your specific insurance company, but several term life policies have an option to convert them to a permanent life insurance policy. And while making the switch is relatively simple, there can be a few things to keep in mind before moving forward:

• Check your current policy. Even though most term life policies have the option to convert to a permanent policy, they’re not all the same. It’s important to first check the language that’s included in your policy to confirm there’s an option to convert. 
• Check your conversion period. Some insurance companies will let you convert your policy at any time during the term. Other companies, however, might place a limit on when you’re allowed to do this — for example, within the first 10 years of the term. 
• Confirm with your insurance company. Once you check your current policy and the conversion period, contact your insurance provider to convert your policy. It doesn’t usually take very long, and may involve filling out a questionnaire.

If you decide you want a policy with cash value insurance instead, converting term life to permanent life insurance is the best way to do it. You’ll be able to build guaranteed cash value that will grow at a set rate determined by your insurance company, while maintaing your death benefit.

Read more:

• What is a life insurance death benefit?
• Term vs Permanent Life Insurance: Which is better?

How to Choose Between a Term Life and Permanent Life Insurance Policy

Are you still not sure which will suit your needs best?

If you’re not positive about what you’re going to need, term life is a good insurance policy to start with due to its affordable premiums and simplified benefit structure. That said, there are plenty of advantages to permanent life insurance, depending on your circumstances. (For more information, read our “How long does it take to get a life insurance policy?“).

Here are a few things to keep in mind if you’re weighing your options between term life and permanent life insurance.

Term Life Insurance

Fixed premiums and a face-value death benefit appeal most to those who:

• Want an affordable option. Term life is usually less expensive than other life insurance policies and can give you peace of mind if you’re healthy and young. Term life can be a good starting point for individuals with less disposable income, since you can usually convert it into a more expensive permanent policy, if you want to.
• Aren’t interested in investing. If investing or generating cash value isn’t a top priority at this time, then a cheaper term life policy can save you money. You can also take the money you would save with a cheaper policy and invest it somewhere else for a similar return on your money.
• Only need short-term coverage. For older individuals who haven’t yet taken out a life insurance policy, term life coverage can set your family up financially using the limited time you have left. The death benefit can help pay for certain debts, mortgages, and your children’s or grandchildren’s college tuition.

Read more: Best Life Insurance Policies When You Have Grandchildren

 If you don’t fit into one of those categories, another option may be better suited for you.

Permanent Life Insurance

On the other hand, long-term cash accumulation and borrowing opportunities are best for individuals who:

• Want guaranteed cash value policy. Term life doesn’t have cash value, but permanent life insurance does. A certain amount from each premium is deposited into a savings vehicle with a predetermined — and guaranteed — growth rate, which allows you to increase your wealth while preparing for the future.
• Want to ensure they’ll leave money behind. The death benefit is going to pay out no matter when you pass away. This helps guarantee that you’ll leave behind an inheritance to any beneficiaries outlined in your policy. Term life coverage doesn’t give you the same promise of security.
• Can afford higher premiums. It’s more expensive to commit to lifelong payments, especially if your financial circumstances change. However, if you can afford it, you’ll increase your total wealth and still guarantee your family’s inheritance.

There’s no perfect answer when choosing between term life and permanent life insurance policies. It’s going to depend on what works best for your needs and what you can afford. 

Read more: Short-Term Life Insurance: What It Is and How It Works

Case Studies: Illustrating Term Life Insurance and Cash Value Considerations

Case Study 1: John’s Term Life Insurance Policy

John, a 40-year-old individual, decided to purchase a term life insurance policy to protect his family financially in case of his untimely demise. He chose a 20-year term policy with a death benefit of $500,000. The policy provided peace of mind for John, knowing that his family would be financially secure if anything were to happen to him.

However, John was aware that his term life insurance policy did not have any cash value. He understood that he wouldn’t be able to borrow against it or accumulate funds over time. Instead, the policy solely focused on providing a death benefit to his beneficiaries.

Case Study 2: Sarah’s Conversion to Permanent Life Insurance

Sarah, a 35-year-old individual, had been holding a term life insurance policy for the past 10 years. As she evaluated her long-term financial goals, Sarah decided that she wanted a policy with cash value. Fortunately, her term life insurance policy allowed for conversion to a permanent life insurance policy with cash value.

Sarah contacted her insurance company and initiated the process of converting her term policy. By making this switch, she would have the opportunity to build guaranteed cash value while maintaining her death benefit. Sarah recognized that converting to a permanent policy would provide her with additional financial flexibility and potential borrowing opportunities.

Case Study 3: Mark’s Decision Between Term and Permanent Life Insurance

Mark, a 30-year-old individual, was in the process of selecting a life insurance policy that suited his needs. He compared the benefits of term life insurance and permanent life insurance to make an informed decision. Mark’s primary considerations were fixed premiums and a face-value death benefit.

As a young professional with dependents, he wanted a straightforward policy that offered affordable premiums and a sufficient death benefit to support his family if he were to pass away unexpectedly. After careful evaluation, Mark opted for a 30-year term life insurance policy. He recognized that term life insurance aligned better with his current financial situation and goals.

Find the best policy for you and your family

Whether you are choosing between Big Lou life insurance or other life insurance companies, weighing your options for life insurance policies and deciding between them can be a challenge. This decision could greatly impact your family down the line, and it’s only natural that you want the absolute best outcome for yourself, your beneficiaries, and your financial well-being. (For more information, read our “Big Lou Life Insurance Review & Complaints“).

This guide can help you make a more informed decision and understand which type of life insurance policy will provide what you need. As you narrow down your options, use the free comparison tool at dev.expertinsurancereviews.com to identify the best plans and policy prices for you. 

With Insurance Education resources, plenty of reviews, and free quotes, you can find peace of mind knowing you made the right choice and that your family will be protected after you’re gone.