There are two broad types of life insurance. These are known as term life insurance and permanent life insurance. These two types of life insurances have their unique sets of advantages and disadvantages.
Term life insurance has a determinate period of coverage. For instance, this coverage period could be 10 years long. If the policyholder does not pass away within that period, the coverage might end.
As the name suggests, permanent life insurance is a type of life insurance that lasts until the policyholder passes away. You may have heard the term cash value. It is existent in certain life insurance policies.
However, is cash value applicable in a term life insurance policy? In this article, we will answer that question for you.
Does Term Life Insurance Have A Cash Value?
The short answer to this question is, for the most part, no. Most of the time, term life insurance policies do not have a cash value. Term life insurance is one of the most affordable types of life insurance out there.
More about Term Life Insurance Premiums
A term life insurance’s premiums per month are fairly inexpensive. This type of life insurance policy is often recommended for adults with dependents such as children and a spouse.
Most of the time, companies that offer term life insurance have 10-year, 20-year, and 30-year period policies for potential customers. As mentioned, policyholder’s beneficiary/beneficiaries will only receive the death benefit if the policyholder passes away within the period of his/her policy.
When does Term Life Insurance have a Cash Value?
However, there is a chance that your term life insurance policy may have a cash value. This is the case when you purchase an optional rider known as return of premium. Return of premium has a cash value included in it.
What is a Cash Value?
But what exactly is a cash value? For those who are not aware, cash value in a life insurance policy refers to the feature that seems like an investment or savings account.
Cash value also grows tax-deferred over the life of the policy. A policyholder’s cash value can be withdrawn, or even be used to take out a loan.
It can also be used to pay the life insurance policy’s premiums. However, a policy’s cash value also comes with certain risks.
Risks of Using Cash Value on Premiums or Loans
One risk of using cash value is that it takes a long time to accumulate. Although you can build your cash value in 10 years, it is best not to withdraw it yet.
This is because your cash value could value less than the premiums that you have paid for in the last 10 years. It is recommended to wait for 20 or 30 years to let your cash value in your life insurance policy grow.
Now, in a Return Of Premium feature of certain term life insurance policies, your rider can return a portion or all of your money that you have paid on premiums. That is possible if the money paid was not used once your policy ends.
Some Return Of Premium riders offer cash value.