If you buy a cash surrender value policy, be sure you will be able to keep up
premium payments for at least fifteen to twenty years. If you cash the policy in before that
time, the surrender charges and other expenses might leave you little actual cash surrender
Agent commissions on cash surrender value policies are
several times higher than those on Term Life Insurance policies. Keep this in mind if an
agent continues to recommend a Whole Life Insurance policy when you ask about Term Life
The insurance company will lend you money against the cash surrender value of
your policy, or you may use your cash surrender value as collateral for a bank loan. If the
loan is with the insurance company, you may have the option of paying the loan interest from
any value that is left or future dividends that you earn. But, if there is not enough
left in your account to support at least those payments, you are in danger of losing the policy
altogether. Plus, if you die and the loan has not been repaid, the insurance company
will deduct the amount owed plus interest from the money paid to your beneficiary.
In recent years, some consumers were encouraged to make a loan against the cash surrender value
or to use dividends from insurance policies they already owned to buy a new or additional
policy. Some consumers found they had taken too much in loans. They lost the first policy and
then couldn't afford the second policy.
Even if you are in no danger of losing one or both policies, these kinds of transactions are
not generally in your best interest.
Whole Life Insurance may be called straight life, ordinary life, or permanent
insurance. Whole Life Insurance covers you for as long as you live, as long as you pay the
premiums. There is no need to renew Whole Life policies. In order to buy Whole Life Insurance
you will usually have to fill out a health questionnaire, and you may need to have a medical
exam. Depending on the medical information you provide, your premiums may be higher than the
standard rate, or the insurance company may decide not to offer you a life insurance policy. It
is important to be very honest about any medical conditions which could affect your life
insurance. Your beneficiaries might receive no benefit at all if you die within two years of
buying the policy and you have not told the truth about a situation or medical condition which
would have caused the company to deny you insurance if they had known the truth.
With a Whole Life Insurance policy, you generally pay the same amount in premiums for as long
as you live. This premium is based on your age and your health at the time of purchase. In some
cases, the premium you pay may change over time, but you would be shown this when you first buy
the policy. Be sure you understand what your premium payments will be and that you can afford
them over time.
In the early years of the policy, premiums for Whole Life Insurance may be much higher than you
would pay for the same amount of Term Life Insurance. But remember, the premiums in most term
policies will rise each time you renew.
Many Whole Life Insurance policies also earn dividends, usually on an annual basis. If you do
not take the dividends out when they are earned, but instead leave them on account with the
insurance company, the dividends will also earn interest.
If a company pays dividends, it may pay more or less in dividends than it had
been paying when you bought the policy. The dividends a company will pay depend on many
factors, including the performance of their own investments and the efficiency of their
operations. The company's earnings and expenses can fluctuate just like the stock market. When
you are choosing an insurance company that pays dividends, ask for a company's history of
projected dividends versus paid dividends. Remember that dividends are not guaranteed and may
differ from those shown in sales illustrations.
Sometimes, dividends may be used to purchase Paid-Up Additions (PUA's) to your policy, an increase
to the death benefit. Some companies will use the dividends on your policy to buy
additional Term Life Insurance. But, you might have less insurance than you planned if
the dividends go down and these additions did not supplement your benefits.
In recent years, many consumers were told that dividends their policies earned, and the
interest on those dividends might, or would, become large enough to pay the premium payments.
(This is sometimes called "abbreviated payment," or "vanishing
premium.") But, often this didn't happen and those consumers were stuck paying for
insurance they couldn't afford. Or, they lost their insurance plus all the money they had paid
If you decide to buy a policy which has an abbreviated payment or vanishing premium option, you
should keep close track of your policy's earnings. Changes in interest rates, cost of
insurance, policy expenses and loans can quickly eliminate your policy's ability to pay for
itself. Even if you can stop paying premiums at some point, you might have to start paying
again at some later point.
Unless the insurance company guarantees in writing that you will no longer have to pay
premiums after a certain time, you should assume you will have to continue to pay.