Can A Term Life Insurance Policy Have A Cash Value?
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8 responses to “Can A Term Life Insurance Policy Have A Cash Value?”
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Term Life has NO cash value. Some providers will allow you to buy a “return of premium rider” on a term policy. This is better than nothing, but not a good investment. If you should exercise the return of premium option you will not receive any interest on the money you’ve paid in, and likely will not recover the entire amount paid as there will be fees assessed.
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That is a great question! The traditional term policy does not have a cash value, and very few moving parts. That is why they are so cheap. The industry has begun to offer term policies that have some options to get your premiums back, and so have a small cash value, but they are more expensive than the term policy most people would think of. So as a rule, no this type of policy won’t have a cash value. If that is something that you want, a whole life policy is what you should look into. Thanks for asking!
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Term insurance is pure level protection offered for 10, 15.20, or 30 years and carries no cash value build up in it. This type of coverage is much more affordable and because it is much cheaper than traditional cash value insurance the policyholder can be covered by the right amount of protection at the time in life that it is needed the most, the early years. Savings should always be separated from the life insurance and should include 401ks, IRAs, and mutual funds. Only buy term insurance and save the difference outside the policy and this growth in assests will eventually eliminate the need for life insurance all together in the later years.
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I offer my clients cash value term insurance when it fits their needs. The cash value is not significant but can be helpful if the insured wishes to maintain the insurance past the period (10, 20, or 30 years) during which the premium is guaranteed. Some clients find that extra cushion very important.
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Traditional term life insurance does not have cash accumulation component as mentioned earlier. The return of premium feature is not really a cash value but rather a cash refund. We do sell a specialized term life with an annuity rider allowing the policyholder to build a separate cash value outside of the term life insurance with a split premium. That is as close as I have personally seen in the market place.
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Term insurance can build a “terminal reserve” and it is a cash value but it is not available to the policy owner as cash. Return of premium features aside, term insurance doesn’t otherwise generate “cash value.” The reason a “terminal reserve” develops is that in early years of the policy life the premium is in excess of the true risk charge and the policy banks the excess premium for later years when the premium collected is less than needed to pay the risk cost. Annual Renewable Term (ART) was priced for each year. 20 year level term averages the 20 years of premium charges into an average annual premium (level premium). The averaging of premium is why a terminal reserve develops.
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It is not normal for a term life insurance policy to have a cash value. As Lenny said, if you buy a return of premium term policy, it will return the premiums you paid in if you keep the policy until the end of the term. But you cannot collect that unless you surrender the policy. Term insurance keeps its prices down by only offering a death benefit without the added benefit of accumulating a cash value.
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Although the great majority of term policies have no cash value, there are some “return of premium” policies that do accumulate cash and are designed to return all premiums at the end ot the term period. So yes, it is possible to have cash value but it does not work in the same way the cash value in a whole life or universal policy would work.
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