Whole life insurance policies combine the protection of life insurance with a savings feature. As the years go by and you pay your whole life insurance premium, your policy develops cash value. If you decide you no longer wish to keep your policy in force, you can cancel your policy and receive the cash surrender value.
Definition
The cash surrender value of life insurance is the amount of cash you can receive when you surrender, or cancel, a whole life insurance policy. The cash surrender value of a policy will vary and is affected by factors spelled out in the terms of your policy, such as loans taken out against the policy and administrative fees. The cash surrender value is less than the face amount your beneficiaries would receive upon your death.
Building Cash Value
Most people pay equal premium amounts over the lifetime of a whole life insurance policy. It costs less to insure a young person than an older person. This means that the premium you pay when you are young covers the cost of your coverage, the insurance company's administrative costs and profits, and has money left over. That money accumulates and grows as it is invested by the insurance company, creating cash value for your policy.
Time Frame
During the first three to five years of a whole life policy, little cash value accumulates. The insurance company recoups its administrative expenses from initial premiums. These administrative expenses include agent commissions and the cost of underwriting. The amount of time it will take for cash value to begin to accumulate will vary based on how old you are when the insurance policy is purchased and the amount of administrative expenses that need to be covered. Your policy will come with a schedule that shows how soon your particular policy develops cash value. As you near your life expectancy, your level premium payment may need to be combined with funds from your policy's cash value to pay the costs of your coverage; this means the cash surrender value of your policy may decrease as you age.
Considerations
If you are considering surrendering your policy because you are having trouble paying your premiums, the cash value of your policy may cover your premiums; talk with your insurance company and check the terms of your policy. If you are considering surrendering your policy because you are older and have financial needs, you may be able to take a loan from your policy or receive a life settlement.
Size
As you age, you may find you need less insurance. Large debts, such as a mortgage or college expenses for example, may have already been paid. You may be able to use the cash value of your life insurance policy to fund changing your policy from one which requires regular premium payments to one which requires no premium payments and provides a smaller face amount. Review your financial situation and make sure that the insurance policies you own are the best fit for your circumstances.
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