Why term life insurance could be more affordable
One of the reasons term life insurance is typically more affordable than whole life is that most people outlive their terms. People tend to purchase term life when they start families or buy their first homes. Usually such people are in good health. That makes it less risky for insurance companies to cover them. Another reason companies are able keep term life premiums lower is that premiums are almost never refunded. This is normally the case even if you cancel your policy. So in most cases you shouldn’t expect any money back after your term expires.
Special exceptions
There are a few instances when you may have term life insurance premiums refunded to you. By law, if you cancel a term life insurance policy within 30 days of purchasing it, the company must refund any money you paid. In addition, if you pay some of your premiums ahead of schedule and then cancel your policy, the company should return those early pre-payments. Then again, you might also choose to buy something called a return-of-premium rider.
What is a return-of-premium rider?
A rider is an additional benefit to your insurance policy that you can usually add free-of-cost or purchase for a one-time fee. If a rider has a fee, it will be tailored to your individual policy but is typically not very expensive. A return-of-premium rider should ensure that all of your premiums are refunded to you after your term expires. If you cancel your policy before your term ends, this rider also allows you to recover a percentage of the premiums you paid. Keep in mind that you are only refunded your regular premium payments, not the actual death benefit of your policy, which could be much higher!
But there’s a catch…
A return-of-premium rider can make your term life insurance into a savings account that will leave you with a nice nest egg at the end of the term. However, it will raise your monthly premiums. A healthy male non-smoker in his thirties will generally pay premiums that can be around 30 percent higher. A male in his forties or fifties with some health issues could pay premiums that are double to triple the cost of normal term life insurance. In addition, if you have to pay a one-time rider fee, it is usually not reimbursed at the end of the term. On the bright side, all the premiums you get back are considered a refund, so they are not taxable.
Other options
Many companies, including TruStage®, allow you to convert your term life insurance policy into a whole life insurance policy as you age. This is an option that will allow you to access a portion of the premiums you pay into your policy as a cash source.
In a whole life insurance policy, a fraction of the money that you pay every month is put in a separate account that earns interest over time. This account is known as the “cash value” of your policy. After a certain point, you can borrow money from this account no questions asked. However, you will have to pay the money back with interest, and failing to do so will reduce the death payout to your loved ones if you pass away. Depending on how many years you’ve had the policy and your age, you may also have to pay an early withdrawal fee.
If you need to, you also can get the entire “cash value” of your whole life policy by canceling, also known as “surrendering” the policy. That will require you to pay income taxes on the money, and you may have to pay “surrender fees” to your insurance company.
Conclusion
If you want to get money back from your term life insurance, you can adapt your policy for this purpose. If and how you choose to do so will depend on your situation. You may want to use a return-of-premium rider to make your term life plan into a savings account. On the other hand, you may prefer the low rates of term life insurance when you are young, then convert to whole life insurance when you are older.
FAQs
Another reason companies are able keep term life premiums lower is that premiums are almost never refunded. This is normally the case even if you cancel your policy. So in most cases you shouldn't expect any money back after your term expires.
Do I get my money back if I outlive my term life insurance? ›
Am I entitled to return of premium on my term life insurance? You're typically only entitled to getting your term life insurance money back if you purchased a return of premium rider with your term policy, you made your payments on time, and you're still living when the term ends.
Do you get money at end of term life insurance? ›
Term life is typically less expensive than a permanent whole life policy – but unlike permanent life insurance, term policies have no cash value, no payout after the term expires, and no value other than a death benefit.
Do you get cash back from term life insurance? ›
Once the term ends, the coverage ends, and your beneficiaries don't receive any payment. Term insurance policies don't include cash value. This means you can't borrow against your policy. You also won't get any cash value back if you cancel your policy.
Can you cash out term life insurance? ›
Term life is designed to cover you for a specified period (say 10, 15 or 20 years) and then end. Because the number of years it covers are limited, it generally costs less than whole life policies. But term life policies typically don't build cash value. So, you can't cash out term life insurance.
At what age should you stop term life insurance? ›
Many people in their 60s and 70s may no longer need life insurance. They may have already paid off the house, stopped working, sent the kids off to care for themselves or accumulated enough assets to offset the need for life insurance. But sometimes buying or maintaining a life insurance policy over age 60 makes sense.
Does term life insurance have a surrender value? ›
Term policies don't build cash value, so of course, there's no cash surrender value. Unlike term life insurance, permanent life insurance builds cash value and is available in several forms. The most popular types of permanent insurance are whole life and universal life.
How long should I have term life insurance? ›
When it comes to mortgages and debts, your term should last as long as you'll be paying the debt (for example, if you have 20 years left on a mortgage, a 20-year term would keep your family protected). Families with long financial obligations should consider a longer-term life insurance policy.
Is term life insurance worth it? ›
When is term life insurance worth it? Term life insurance is smart when you have debts or a time-boxed expense — something you want to ensure your dependents can afford should you pass away. This might include a mortgage or credit card balance, for example, or something like school tuition or car payments.
Can I sell my term life insurance policy? ›
A life insurance policy, whether it's a term life or whole life policy, is your personal property. You can sell it just as you would anything else you own, but there are some things to consider.
While you can't cash out term life insurance, you can sell your policy. Additionally, you may have other options if you want to change your coverage, such as lowering your premium payments or converting to a permanent policy. Aflac offers term life insurance with premiums that fit most budgets.
Can you get a payout on term life insurance? ›
If you have a term life insurance policy, the coverage lasts for a certain length of time — such as 10, 20 or 30 years — and features a simple payout of the death benefit amount if you pass away during the policy's lifespan.
Does term insurance pay back? ›
Under a basic term insurance plan, you do not get money-back at the end of the life insurance term. On the other hand, under a money-back term insurance plan, you get assured returns at the end of the policy term.
Is return of premium term life insurance worth it? ›
Bottom line. A return of premium policy mitigates the risk of life insurance by returning your payments if you outlive the term. In most cases, however, you'd be better off putting the extra money you'd spend in a savings or investment vehicle, where it could grow over the term of the policy.
What happens to leftover life insurance money? ›
Key Takeaways
Taking out cash value reduces the future death benefit for your heirs. Any unused cash value is forfeited to the insurer when you pass away, though some policies let you add it to the death benefit for an extra fee.
What is the cash value of a $10,000 life insurance policy? ›
The $10,000 refers to the face value of the policy, otherwise known as the death benefit, and does not represent the cash value of life insurance policy. A $10,000 term life insurance policy has no cash value.
Can you get money back from a lapsed life insurance policy? ›
Some insurance policies include a nonforfeiture clause, which means that if you stop paying premiums, you still receive some sort of benefit. You can think of this as a lapsed policy refund. If your coverage lapses, the insurance company will refund part of your premium payments and/or pay you the policy's cash value.
