Ask the Life Insurance Expert

I have had a whole life policy for 11 years. If I surrender it or borrow from the cash value, will the death benefit decrease?

If you surrender your whole life insurance policy, you'll collect the cash value and the policy will no longer be in force. However, collecting the surrender value means there will no longer be a death benefit for your beneficiaries. Check the policy to see whether you have to pay a surrender fee. Also, keep in mind that any portion of the surrender value that's above the amount of premiums you paid into the policy is taxable.

You can also borrow against the policy. You'll pay interest on the loan and must repay the money, though, or your death benefit will be reduced by that amount or more. Read the policy, and touch base with your life insurance agent to make sure you understand the ramifications.

Only permanent life insurance, such as whole life, which covers you for your entire lifetime, features a cash value component. Term life, on the other hand, provides coverage only for a certain period of time, such as 10 or 20 years, and is much less expensive than whole life because it does not include a cash value feature.

The cash value component can be confusing for buyers, many of whom think it will grow faster than it actually does. Growth of the cash account doesn't pick up speed until at least several years into the policy, and it may be as long as 20 years before the rate-of-return beats what you could have gotten had you bought an inexpensive term life policy and invested the extra money you would have spent on permanent life insurance.

For more, see Cash value in life insurance: What's it worth to you?


Last updated: May. 17, 2011
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