Term Life Insurance: Getting Money Back

Term life insurance is a popular choice for people looking to provide financial security for their loved ones at an affordable rate. But what happens to your money if you outlive the policy term? In most cases, you won't get a refund when your coverage ends, but there are some instances where you can recoup your premiums.

If you cancel your policy within the free-look period, which is usually 10 to 30 days from when your coverage begins, you can get your money back. Additionally, if you cancel within 30 days of purchasing the policy, the company must refund your money by law. If you've paid premiums ahead of schedule and then cancel, those early payments should also be returned.

Another way to get a refund is to add a return-of-premium rider to your policy. This optional add-on will refund all or some of your premiums when the policy term ends, provided you've made your payments on time. However, this add-on can increase your monthly premiums.

While term life insurance is a great way to ensure your family is protected, it's important to understand the limitations when it comes to getting your money back.

Cancelling during the free-look period

The free-look period begins when you receive the policy documents or on the day the policy is delivered. During this time, you can review the terms and conditions of your policy and decide whether you want to keep it. If you are not satisfied, you can cancel the policy and receive a full refund of your premium.

To cancel during the free-look period, simply contact your insurer. You can cancel for any reason, whether your financial situation has changed, you've found better coverage, or your employee benefits have changed. It's important to note that the free-look period is a risk-free window that gives you the flexibility to review your policy and ensure it meets your needs.

If you decide to cancel after the free-look period ends, you won't be penalised, but you won't receive a refund of your premium. Therefore, the free-look period is an important opportunity to carefully consider your policy and make any necessary changes or cancellations.

Return of premium (ROP) rider

Return of premium (ROP) life insurance is an optional add-on to a term life policy. If you outlive the policy term, an ROP rider will pay you all or some of the money you spent on policy payments. Without an ROP rider, if you're still living when the policy term ends, your coverage will simply end, and you will not receive any money back.

An ROP rider typically refunds you the total premium you paid for your base policy and the ROP rider. It may not refund fees or the premium you paid for other riders on your policy. Being late on payments may reduce your refund or disqualify you from receiving one at all.

The money back from your term life insurance may not be taxable unless there is a gain. Consult a financial advisor to understand the potential implications. The refund might not include fees and other riders you have on the policy, and missing payments can disqualify you from getting your ROP benefit.

If you die during the policy term, your beneficiaries can claim the death benefit, just like with any other life insurance policy.

An ROP rider can be added to your term life insurance policy for a one-time fee. This fee is typically not very expensive and is tailored to your individual policy.

Term life insurance is usually more affordable than whole life insurance because most people outlive their terms. People tend to purchase term life insurance when they start a family or buy their first home and are usually in good health. This makes it less risky for insurance companies to cover them.

A potential downside of an ROP rider is that you essentially provide an interest-free loan to the insurer. If you factor in inflation, you will get less money back at the end of the term since the refund does not include any interest.

Another option is to buy a traditional term life insurance policy and put the money you would have spent on an ROP rider in a safe investment account. That way, you can preserve some cash and earn a return on your money.

Cancelling a convertible term life policy

• Stop paying your premiums and let your coverage end
• Wait until the term ends and allow the policy to expire
• Let your insurance company know of your intent to cancel via phone call or mail

However, it's important to remember that cancelling a term life insurance policy means you won't get any refund and will lose your death benefit. If you cancel a permanent life insurance policy, you can surrender or cash out your policy, but this will also result in losing your life insurance protection and may be subject to surrender charges and taxes.

If you have a convertible term life policy, you can sell it instead of cancelling it. A convertible term life insurance policy is a type of temporary term life insurance that can be turned into permanent life insurance that will not expire. It gives you the option to buy low-cost temporary coverage now while keeping your options open to buy lifelong coverage later.

Convertible term life insurance policies allow you to convert a term policy to a permanent policy, such as whole life insurance, without going through the insurer's underwriting process again. This means you won't have to answer health questions or complete a new medical exam. The conversion can happen as long as the policy conditions have been maintained, including making payments on time.

The conversion option may be part of the basic insurance contract, or it might be available by purchasing a special rider and attaching it to your policy. Some insurers offer the conversion option for the first few years of the policy at no charge and then provide the opportunity to add a conversion rider later for an extra cost.

Most convertible insurance policies allow policyholders to convert the policy for a predetermined number of years, such as 10 or 20 years. The conversion period refers to when you can convert your policy to permanent life insurance and usually occurs before the term ends or before you turn 70, whichever comes sooner.

If you cancel your convertible term life policy, you will not receive any refund for the premiums paid. However, if you have a "return of premium" rider and you outlive the policy, the premiums will be refunded.

Surrendering a permanent life insurance policy

Reasons for Surrendering a Permanent Life Insurance Policy

There are several reasons why someone might choose to surrender their permanent life insurance policy. These include:

• Their adult children are no longer financially dependent.
• Their spouse has passed away.
• They can no longer afford the premiums.
• They have found a better investment opportunity.
• They need cash quickly to cover unexpected expenses.

Process of Surrendering a Permanent Life Insurance Policy

To surrender a permanent life insurance policy, follow these steps:

• Contact your insurance company to initiate the surrender process.
• Submit the required documentation, such as a surrender request form.
• Receive the cash surrender value via check or electronic transfer.
• Obtain a confirmation of policy termination from your insurance provider.

Consequences of Surrendering a Permanent Life Insurance Policy

There are several consequences of surrendering a permanent life insurance policy. These include:

• Loss of life insurance coverage: Your beneficiaries will not receive a death benefit when you die.
• Financial loss: The cash surrender value may be lower than the total premiums paid, and you may have to pay surrender fees.
• Tax implications: You may have to pay taxes on the surrender amount if it exceeds the amount you paid in premiums.

Selling your policy

Selling your life insurance policy is an option if you no longer need, want, or can afford it. You can sell your policy to a third-party company in a process known as a life insurance settlement. However, it's important to note that you will sell your policy for less than the death benefit.

How to sell your term life insurance policy

• Find a reputable broker: You will need to share information and documents regarding your policy with a broker. The broker will then let you know whether or not it is feasible to sell it.
• Make a sale: The broker will do their research and likely match you with a buyer who will take over your policy. You can expect the buyer to pay the agreed-upon price and make the premium payments on your behalf. Then, once you pass away, the buyer will receive the death benefit payout.

You may be able to sell your term life insurance policy if it is still active. Policies that have lapsed or expired do not qualify. Eligibility to sell an active policy depends on factors such as the policy's face value, remaining term, and the policyholder's age and health.

If you have a term life insurance policy that you can't or don't want to sell, you may consider the following alternatives:

• Adjust your term life insurance coverage: If your premiums are no longer affordable, you may be able to lower your coverage level and enjoy lower premiums.
• Convert to a permanent life insurance policy: You might be able to convert your term life insurance policy to a permanent policy that builds cash value, such as whole life, universal life, or variable universal life insurance. Keep in mind that your premium payments will increase.
• Cancel your term life insurance policy: If you cancel your term life insurance policy or let it lapse, you will get rid of your premium payments, but you will not receive any benefits.

Frequently asked questions