What Is the Cash Surrender Value of a Term Life Insurance Policy?
Cash values generally do not apply to term life insurance policies. However, a special type of term life insurance does offer a cash-out option when the policy term is over. Term life insurance with a return of premium allows you to receive cash when you are finished with the policy. Make sure you understand how these policies work before you buy them.
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Identification
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Term life insurance with return of premium is a special type of life insurance. You must request this feature from your life insurance company. Some companies offer a rider, an alteration to the base policy, that lets the policy generate a cash value that accumulates over the term of the policy but which stays with the company and is not available to the policyholder.
Significance
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The cash value of the term policy is held with the insurance company. When the term of the policy ends, the policyholder receives a refund of all of the premium payments that they've made plus pre-determined interest at a rate chosen by the policyholder at the beginning of the policy.
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Benefits
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The benefit of this type of term life insurance is that term life insurance premiums are not wasted. You receive the benefit of a life insurance policy for the duration of the term. However, when the term is up, you also get back everything you've paid into the policy. This refund can then be used to purchase another policy or it can be used to invest in other financial products.
Disadvantages
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The disadvantage of term with return of premium is that the premiums are usually at least double the cost of an ordinary term life insurance policy. Additionally, the interest paid on your return of premium is often lower than what is available in an alternative investment like a bank CD or money market account.
Considerations
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Consider whether you could earn enough interest using a bank CD, fixed annuity or money market account to equal or exceed the cost of the return of premium feature on a term life policy. In other words, suppose that a return of premium term life policy costs $50 per month, and the insurance company returns $750 at the end of your term. If you are able to buy an ordinary term life insurance policy, and just put away enough money to equal or exceed that $750 that the insurer would have given you with the return of premium feature, then consider purchasing the ordinary term policy instead of purchasing the return of premium feature. Additionally, consider whether you have the skill and ability to manage a separate side fund. The return of premium feature may be beneficial as a forced savings plan if you don't think you could maintain a separate savings to offset the cost of an ordinary term insurance policy.
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References
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