Which Types of Life Insurance Policies Have Cash Surrender?
All life insurance policies, except the many forms of "term" insurance, accumulate cash value which may be accessed by loan while the policy is in force, or at termination when the contract is surrendered. The portion of cash value available by loan or surrender depends on the policy type, early surrender penalties, how long the contract has been in force, policy and premium size. The cash surrender value would be reduced by any existing policy loans and loan interest.
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Traditional Whole Life
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This cash value contract provides guaranteed future cash accumulation, a guaranteed interest rate and a guaranteed face-amount death benefit, at a fixed level premium that will not change for any reason over the insured's lifetime. Insurance company guarantees are based solely on the full faith and credit of the insurer and are not backed by any government body. The strength of traditional whole life is the assurance of lifetime insurance at a known fixed price. Its weakness is its initial high cost, which may be five to 10 times more expensive than the same amount of term insurance.
Interest Sensitive Whole Life
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Also called "non-traditional" whole life, this policy offers potentially higher cash value accumulation or lower premiums, based on current interest rates paid on similar risk investments like bank savings and CDs. In an economy where current rates are generally higher than the guaranteed fixed accumulation rates of a traditional whole life policy, a non-traditional product may accumulate higher cash value. In exchange for a more competitive earning rate or lower premiums, insurers often retain the right to increase future premiums within parameters specified in the contract.
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Universal Life
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Universal life was introduced in the 1980s as an alternative to traditional whole life and term insurance. It combines the two features of death protection and tax-deferred savings in a flexible contract that permits the policy owner to increase or decrease premium payments, and even the amount of protection within certain prescribed limits. An increase in the death benefit would be subject to satisfactory evidence of insurability. Most universal life policies will guarantee the initial death benefit, providing the insured does not reduce the recurring premium payments below a stated fixed amount, and does not borrow against the policy.
Variable Life
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Variable insurance invests the cash value portion of insurance premiums in managed, stock-based money pools called "separate accounts," similar to mutual funds. The policy owner may allocate the cash value among several risk classes offered by the separate account managers depending on investment goals, time frame and risk tolerance. A variable policy can be configured as a whole life or universal contract. Risk-averse individuals are generally not good candidates for variable life. Variable insurance is a security and can only be sold by licensed registered representatives of a licensed broker dealer.
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