Life insurance is offered in two basic types: term and whole life. Which one you should select depends on your family situation, age and savings goals. Some, but not all, life-insurance policies allow you to save and invest money, and some have a cash value. It's important to understand how cash surrender works before you sign up for any form of life insurance.
If you do not need a savings vehicle but still want to buy life insurance, you should consider a term policy. This is simply a policy that pays your beneficiaries if your die. You pay for the policy in installments, either monthly, quarterly, semiannually or yearly. If you stop paying the premiums, the policy lapses. There is no value in the policy if it lapses, and you don't receive any money for surrendering it.
A whole life policy is life insurance combined with a savings or investment account. The premiums, which are higher than for term life insurance, pay for the insurance and also represent a regular contribution to a separate account, which gradually rises in value as you continue paying premiums. The investments in the account may go into mutual funds, money market funds or other investment vehicles that are under professional management.
As you pay premiums, the whole life policy gradually builds a cash value as the investment account increases. If you borrow against this value, the insurance company does not restrict how you use or repay the money. The loan may accrue interest you must repay, or the insurance company may contribute an equal amount of money to the account while the loan is outstanding to earn the interest back. The amount you borrowed is simply subtracted from the cash value until you repay it.
The cash value also represents the policy's "surrender value." This is the amount of money you will receive if you surrender the policy, an option that remains open to you throughout the time you are paying premium. If you decide to surrender the policy, the insurance company deducts surrender charges as well as any outstanding loans and interest charged on those loans. You lose the life insurance coverage and also give up the investment account.