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Ask the Life Insurance Expert

What is the cash value of a $40,000 term life insurance policy?

Term life insurance does not have any cash value. A $40,000 term life policy would pay a $40,000 death benefit to the beneficiary if the insured died within the term. Otherwise, it provides nothing, except for the peace of mind that comes from knowing the beneficiary would have a financial safety net.

Only permanent insurance, such as whole life and universal life, has cash value. Unlike term life, which covers you for a certain period (such as 10, 15 or 20 years), permanent life insurance covers you for your entire lifetime, no matter when you die. It also includes a cash account that grows gradually over time. You can borrow against the cash account, or, once it accumulates enough value, use it to pay premiums. Keep in mind, though, withdrawing money from the cash value reduces the death benefit if you don't repay the loan plus interest by the time you die.

Because permanent insurance provides broader coverage as well as cash value, whole life and universal life are much more expensive than term life.

Insurance agents recommend term life if you're on a tight budget and need coverage for a certain number of years. You can time the term to correspond with your family's greatest financial needs, such as providing for children as they grow up, paying for college and paying off a mortgage.

The decision to buy term life doesn't mean you have to rule out permanent life insurance down the road. Most term life policies sold today can be converted to permanent life insurance. Before you buy term life, check the policy's rules for when you can convert and what type of permanent life insurance policy you can choose if you decide to convert.

For more, see The basics of term life insurance.

Last updated: May. 2, 2012