Is There Cash Surrender Value in Term Life Insurance?

Wondering whether there is cash surrender value in term life insurance? If you’ve been curious, you’re in good company and you deserve an answer. First, let’s understand a bit more about how cash surrender value works and the full range of options available to term life insurance policyholders.

Here Are the Fast Facts

  • The cash surrender value of a life insurance policy is the amount that the policyholder receives upon surrendering that policy to the issuing insurer.
  • Term life insurance policies do not build up a cash surrender value (see below to understand why that is and some of your other options)
  • It is permanent life insurance policies that are designed to build up cash surrender value, however, there are differences between policies, carriers, and what are known as “product lines.”

The cash surrender value in life insurance represents the cash amount you get back from your life insurance company when you decide to terminate, aka surrender, your life insurance policy. Understanding whether your life insurance policy was designed to build up cash surrender value over time is crucial for many reasons, from premium payment optimization to taxation. So read on…

What Types of Policies Build up Cash Surrender Value

In general, term life insurance products are simple insurance instruments. They are not investments, they are protected for you and your loved ones and they do not build up any cash value.

It is a permanent life insurance product that is normally designed by life insurance carriers to build up cash surrender value over time. However, there are important differences you should be aware of:

1). Whole life insurance products are designed to build up significant cash surrender value.

2). Universal life insurance products are designed to allow more freedom to the policy owner as to whether he or she wishes to build up significant cash surrender value… or not.

How Does it Work

Term Life Insurance Policies

Term Life Insurance Policies:

A term life insurance policy should be purchased by an individual only if that policy resolves that persons’ “pure protection needs.” Term life insurance is not an investment product. The premiums paid into term life insurance products are designed to cover the dollar exposure of the issuing life insurance carrier throughout the term of the policy. For instance, assume you purchase a term life insurance policy with a death benefit of $1,000,000 and a term of 10 years when you are a 40 years old non-smoking male in good health.

The annual premiums calculated reflect the minimum amount the life insurance carrier must charge in a given year to cover their risk of having to pay out a death benefit due to the death of the life insured in that year. Of course, the likelihood of dying increases with time. However, term life insurance policies generally require policy owners to pay a level premium.

For the example at hand, instead of paying an annual premium of $170 the first year, $300 the second year, $430 the third year, and so on, a real-world annual level premium would likely be at approximately $600, which is much higher than the first-year minimum premium ($170) and much lower than the 10th year minimum premium ($1,120).

What happens with term life insurance policies is that the initial payments are used by the life insurance carrier to lower its net exposure on the policy and to finance part of the later premiums. The level premium is normally the result of an optimization function that forces the final cash value of the term life insurance policy to zero.

This really explains why term life insurance policies are the cheaper form of life insurance and a good option to insure the pure risk of dying too soon.

The annual premiums calculated reflect the minimum amount the life insurance carrier must charge in a given year to cover their risk of having to pay out a death benefit due to the death of the life insured in that year.

Of course, the likelihood of dying increases with time. However, term life insurance policies generally require policy owners to pay a level premium.

For the example at hand, instead of paying an annual premium of $170 the first year, $300 the second year, $430 the third year, and so on, a real-world annual level premium would likely be at approximately $600, which is much higher than the first-year minimum premium ($170) and much lower than the 10th year minimum premium ($1,120).

What happens with term life insurance policies is that the initial payments are used by the life insurance carrier to lower its net exposure on the policy and to finance part of the later premiums. The level premium is normally the result of an optimization function that forces the final cash value of the term life insurance policy to zero.

This really explains why term life insurance policies are the cheaper form of life insurance and a good option to insure the pure risk of dying too soon.

Whole Life Insurance Policies

While level premiums on term life insurance policies are designed to build up no final cash value in the policy (assuming the life insured person survives for the term of the policy), level premiums on whole life insurance policies are designed to do a different thing. They are designed to build up significant cash surrender value that approaches the level of the policy’s death benefits as time passes.

Universal Life Insurance Policies

Universal life insurance policies are permanent insurance, just like whole life policies. What is so different about these policies is that they don’t require level premiums. That’s a big and meaningful difference. Just like whole life policies, they are built to contain cash value. They are more complex financial instruments and beyond the scope of this article but are included here to help you better understand the types of life insurance policies that do have cash value.

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