Can You Get Cash from a Term Life Insurance Policy?

Term life insurance policy offers death benefits to the beneficiary of the policyholder upon their unfortunate demise during the policy term. It does not have any cash value or maturity benefits. However, there are a few ways to get the cash value from a term life insurance policy.

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What Happens When the Policy Matures?

Once the policy matures, you get all the premiums you paid without any interest as the maturity benefit. This is called the Return of Premium feature in term life insurance. It is not a common feature but can be enjoyed by those policyholders who opt for it. 

Several policies offer cash value while the policyholder is still alive, such as permanent life insurance or universal life insurance policy. The other benefits provided by term life insurance are as follows: 

  • Tax Benefit: Once you get the money you invested in the insurance policy, you don't have to pay any tax on it. By purchasing a policy, you get tax benefits on the insurance money while you are paying premiums as well as when you get returns from it. 
  • Capital for another investment: In the end, you get the hefty amount that you can reinvest in your retirement plan, or you can purchase another policy. 
  • Transferable corpus: Once you get your insurance money back, there are no restrictions on how you want to spend that money. You can keep it with yourself or you can pass it on to your heirs. 

Cash Value in Life Term Insurance Policy 

If you get a permanent cover insurance policy, you are eligible for the cash value on your life term insurance policy. Cash value is the amount you receive during your insurance tenure that you can withdraw or use to pay premiums. You can use cash value without jeopardizing your insurance coverage. However, most term insurance policies don't give cash value on the term life insurance. 

Benefits of Term Insurance Policy

You may not get direct cash value from your term insurance policy, yet there are multiple ways you can use your term life insurance policy to yield finance for you.

Listed below are the ways to gain money from your policy:

  1. Complete Policy Surrender

    Once you surrender your policy, you get all the money you have paid as a premium. You also get the interest you have earned on the payments you made on it. However, you must understand that you may get monetary returns in this way, but you will lose your coverage. 

  2. Partial Policy Surrender

    Partial Policy Surrender or timely withdrawals you make from your insurance policy impact your returns. Many insurance companies allow policyholders to withdraw money from the policy on a timely basis for reasons such as educational expenses and down payments. However, when you make frequent withdrawals like these, it significantly reduces death benefits and policy returns. 

  3. Loan Against Insurance Policy

    Many banks or Non-Banking Financial Companies (NBFCs) allow a term life insurance policy as collateral for the loan. If the loan is unpaid at the time of the policyholder's death, all unpaid amounts will be deducted from the death benefit. Taking a loan against an insurance policy can also impact policyholders' CIBIL score negatively, which can lessen the chances of getting a loan sanctioned in the future. 

  4. Using Term Insurance Policy as a Settlement

    If you want to make a settlement and you are low on funds, you can sell your insurance policy to any individual as a payment. Selling an insurance policy is a simple process. However, you will be devoid of insurance coverage. The person buying your policy can surrender or keep it by paying all the outstanding premiums. After repurchasing the policy, the new policyholder will be eligible for all the benefits of the policy. 

  5. Insurance Policy as Collateral on Home Loan

    If you do not want to keep your property like a mortgage or collateral with your bank or NBFC for taking loans, your term insurance policy will be the best financial instrument at your disposal. Most banks accept one or more insurance policies as the collateral on the home loan. 

    You must remember that the policyholder should also be the co-owner and primary applicant on a home loan. In case of the policyholder's death, the insurance policy's death benefit will be reduced to repay the home loan. 

In Conclusion

Purchasing a term life insurance plan always benefits the policyholder in more than one way. In your absence, it will provide for your family. Though it lacks the feature of providing cash value like any other permanent life insurance policy, it can still benefit you. 

If you have a term insurance policy and feel the need for cash, you can always turn to the methods mentioned in the article to meet your requirements.

FAQ's

  • Q. How much term insurance cover should you take while purchasing an insurance policy? 

    Ans: The amount of life insurance cover one would need varies from person to person. Before purchasing insurance cover, you must consider certain factors, like: 
    • Your net annual income
    • Number of family members
    • Standard of living
    • Existing loans and other financial commitments 
    • Estimated expense on children's education
    By making an estimated calculation on the above factors, you can subtract it from the available investments. Based on that, you can make out the approximate amount of the term life insurance plan you want to purchase. In addition, the amount of the term insurance returns also depends upon the kind of plan you want to purchase and the factors on which you want coverage. 
  • Q. Is the premium amount subject to change throughout the tenure of the insurance policy? 

    Ans: No, the premium amount remains the same throughout the tenure period. Premium amount depends upon the policy plan you have chosen, your net annual income, and the term limit for which you are seeking cover. Tax Regulations declared by the Government of India can influence the premiums to an extent. However, it will remain the same as it was at the time of purchasing the policy. 
  • Q. Do smokers have to pay higher premiums than non-smokers for a similar coverage amount? 

    Ans: Yes, smokers do have to pay higher premiums than non-smokers for the same coverage. The reason behind this difference is smokers medically tend to get more health risks than non-smokers. Their chances of contracting chronic illnesses are higher. This ultimately results in more medical expenses, and the chances of claiming the policy are high. Therefore, insurers ask smokers to pay higher premiums to mitigate the risks related to such customers. 
  • Q. Does the term life insurance plan cover the death of the policyholder outside India? 

    Ans: Yes, if the policyholder migrates to another country after procuring an insurance policy, their death will still be covered by the insurance plan. If a policyholder dies while vacationing abroad in a natural manner, then also the beneficiary can claim the death benefit. However, if a person dies outside of India because of participating in an adventure sport or substance abuse, the insurer is not liable to pay the death benefit. In addition, if a policyholder dies in war-prone countries or the Government of India has issued an advisory against travelling in certain countries, death there is not covered by insurance plans. 
  • Q. Can a Non-Resident Indian purchase an insurance policy in India? 

    Ans: Yes, non-residential Indians can purchase an insurance policy in India. He/she can still enjoy all the benefits that residential Indians get. They need to provide a few more documents than Indian nationals, and insurers can ask them to go through the medical test in India. 
  • Q. What happens if I use the cash value for policy premiums?

    Ans: If you don't pay your premiums on time or use your policy's cash value for policy premiums, it will reduce the death benefits and the premium amount. You may also end up losing some of the coverage you would have gotten otherwise.
Written By: PolicyBazaar

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