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All of these types of insurance differ from Term Life Insurance in one way: once you have paid your premiums for a number of years, the policy will have a cash value attached to it. But, if you withdraw all or part of the cash value, the amount of money you receive usually has substantial surrender charges already taken out of the amount you will get. The amount you may expect to receive when you terminate the policy is called the cash surrender value. You may need to pay taxes on the cash surrender value when it is paid out to you.  

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 value remaining.

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 Insurance. 

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  

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 in.

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.  

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