Can I trade my term life insurance for cash value?
There is a lot of confusion regarding different financial products these days, and life insurance is no exception. In fact, with the huge range of different life insurance options, such as whole or term, different coverage amounts, benefit structures, payout plans, rates, and conditions, it could even be argued that life insurance is one of the most confusing financial products of them all. Many readers may have heard of the idea of trading in life insurance for a cash value, or cashing out a life insurance policy. While this can be a smart financial move in some situations, it is important to understand how this idea relates to term life insurance cash value.
The Concept of Equity
When people talk about trading their life insurance for cash value or cashing out life insurance, what they are really talking about is accessing the equity they have built up in the policy. Equity can be understood as the percentage of something that you have paid off. For example, if you have paid $20,000 toward a $100,000 life insurance policy, you would have 20% equity. You could use this as collateral to secure a loan, borrow against it, or, depending on the nature of the life insurance policy you have, trade it for the cash value of the equity. All of these options can be appealing, as they provide a tremendous amount of monetary flexibility. However, before you get to excited, there’s something you should know.
Term Life Insurance Doesn’t Build Cash Value
In order to build equity, the thing being paid for has to be a durable good, something that doesn’t have a fixed end point. For example, a whole life insurance policy lasts your entire life, and so is considered durable. A term life insurance policy has an end point when the policy will no longer be active, which occurs at the end of its term. Because the term ends, there is no equity built into term life insurance plans and thus they cannot be traded for cash value, nor can you sell term life insurance policies for cash. There is no cash value of term life insurance policies.
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