A commonly asked question is “can you get money back on term life insurance?” Nobody wants to make payments on a contract and see nothing in response at the end.
Term life insurance pays out when the policyholder dies, and the beneficiaries file a valid claim. However, most people want something that pays back while they are still alive.
The standard term life insurance policy does not have cash value accumulation. However, you can consider a return of premium rider. Alternatively, you can convert the coverage to whole life so that you can borrow against the assets, or cash it in when the need arises.
- Return of premium pros and cons
- Options for accumulating cash value
Return of Premium Term Life Insurance Pros and Cons
Term life insurance with a return of premium rider allows the owner to get his or her money back at the end of the contract period. The return of premium rider allows the owner to cancel the policy and get back a portion of the paid in premiums.
Of course, this optional rider has pros and cons, which we explore next.
Pros of Return of Premium
The primary advantage of term life insurance with a return of premium rider is that it removes one obstacle or objection to buying coverage. People instinctively want to get something back after paying all those premiums. We hate paying money for something we do not use.
According to LIMRA, only 60% of Americans own a life insurance policy. Many of those do not have an adequate face amount to replace the projected income of both parents. It is a good thing if the return or premium rider helps you decide to actually buy the right amount of coverage.
Most people outlive even a 30-year term life insurance policy and never file a claim. They allow the coverage to lapse and see nothing in response other than 30 years of peace-of-mind. The return of premium rider provides a financial response as well.
Cons of Return of Premium
Higher premiums and lost opportunities are the primary disadvantages of term life insurance with a return of premium rider. You get your money back at the end, but pay much more upfront for the privilege.
Request a term life insurance quote for an estimate of premiums with and without the return of premium rider. You will find that you must pay 30% to 50% extra throughout the span of the contract period.
The interest rate earned on the money held by the company is low compared to what you might earn in an alternative investment. Some analysts suggest that the projected interest rate for making the additional premium payment ranges from 3% to 6%. That rate is not bad for a tax-favored investment, but you could do better in the market.
Does Term Life Insurance Have Cash Value
A traditional term life insurance policy does not have cash value. You cannot borrow against the money in the contract. It does not pay dividends. You cannot cash out or surrender the policy to get your money back.
Term life insurance sample rates illustrate why this policy type is so affordable compared to other forms of permanent coverage with cash value. You are paying for protection for a premature death only, for a short period: 5, 10, 20, or 30 years most commonly. However, you can convert to whole life, or get money back when terminally ill.
Converting to Whole Life
You can convert a term life insurance policy to whole life at any time to begin accumulating cash value. You do not have to show evidence of good health in order to exercise this option.
Converting to whole life to build cash value has several advantages. First, you begin with a lower-cost term life insurance policy during any time when your budget does not allow for a higher-cost permanent contract. Second, you take this step when you are young and healthy. You qualify for coverage before age begins to take its toll. If your health deteriorates, you do not need to worry about qualifying for something offering a savings plan feature.
Term life insurance does not accumulate cash value unless you exercise the conversion option, but you can get your money back if you are terminally ill. You can either sell the policy as part of a viatical settlement or exercise an accelerated death benefit provision.
In a viatical settlement, a third party takes over ownership of the policy and continues making premium payments. In essence, you are selling your term life insurance policy in exchange for an immediate cash settlement. The third party receives the death benefit if you pass away while the coverage remains in force. Do not expect to sell the policy for very much if you are still in good health, and/or the contract is nearing the end.
The accelerated death benefit advances the 75% of the term life insurance face amount if you are diagnosed with a terminal illness. Terminal illness is a disease that cannot be cured or adequately treated and that is reasonably expected to result in the death of the patient within a short period.