Do you get money back after term life insurance?
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.
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.
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.
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.