Term life insurance is a simple prospect. You pay your premiums, and if you die while your policy is paid up, your beneficiaries get a flat sum of money. If not, you get nothing. Whole life insurance -- sometimes called "life assurance" in British English -- is a more complex type of coverage. It carries multiple inherent values depending on the circumstances at the time. Understanding these values and how they interact is an important part of making the most of your policy.
Life Insurance Cash Value
If you die with a whole life insurance policy in place, your beneficiary will receive the policy's face value, just like with term life insurance. With each payment before you die, a whole life policy accumulates value that you can borrow against at any time. In this way, it acts much like a home mortgage.
The "account value" on a life insurance policy is the equity that's accumulated from premium payments on the policy so far. Your statements might call this the "cash value." Administration on life insurance costs the company money. So -- again, much as with a home loan -- you will see only a little accumulation of account value on your policy during the first few years of coverage. As accounts get cheaper to manage as time goes by, your account value will increase more quickly as the life insurance policy matures.
To "surrender" a whole life insurance policy means to cancel the coverage and collect any cash value that's in place. If you do this, the insurance company will levy surrender charges. This surrender charge is typically expressed as a percentage of the account value rather than as a flat fee. Similar to the situation with accumulating account value, surrender charges are usually higher during the early years of coverage. In the first five years, it's not uncommon for surrender charges to be 100 percent.
The surrender value on the policy is the amount you receive if you cancel your coverage. It's the account value minus any surrender charges. As an example, an older account with a value of $10,000 and a surrender charge at 40 percent would have a surrender value of $6,000. Because of the higher fees, your surrender value will often be zero in the first years of the policy.
- New York Life: Life Insurance FAQ
- National Association of Insurance Commissioners. "Unfair Trade Practices Act," Page 880-5. Accessed April 18, 2020.
- Internal Revenue Service. "Publication 544: Sales and Other Dispositions of Assets." Accessed April 18, 2020.
- U.S. Congress. "H.R.1865 - Further Consolidated Appropriations Act, 2020." Accessed April 18, 2020.
- John Hancock Insurance. "Income Taxation of Life Insurance," Page 2. Accessed April 18, 2020.
- Cornell Law School, Legal Information Institute. "26 U.S. Code Sec. 7702A. Modified endowment contract defined." Accessed April 18, 2020.
Jake Wayne has written professionally for more than 12 years, including assignments in business writing, national magazines and book-length projects. He has a psychology degree from the University of Oregon and black belts in three martial arts.