Course: Insurance Planning
Lesson 13: Life Insurance Policy Provisions and Conditions

Student Question:

Concerning the cash surrender option, is this stating that I can receive an amount of cash from my whole life policy based on premiums paid, accumulated dividends and interest earned minus any loan repayment with interest? And can I cash out at any time?



Instructor Response:

You are correct, Mike. And I’ll go one level deeper.

  1. A portion of the premiums paid are for the insurance company’s expenses and the remaining premium paid is credited to cash value. Be aware that the insurance company’s expenses include the mortality costs and administrative costs, such as commissions. Because the administrative costs can be relatively high (such as a commission of 100% of the first year’s annual premium), it’s not unusual to take 2 to 3 years of premium payments to create a cash value.
  2. With respect to dividends, you generally have the choice of receiving dividends, adding them to the cash value, or using the dividends to buy additional life insurance coverage. Generally, your withdrawal of cash value is limited to the cash value less any outstanding policy loans.
  3. You are correct – you may generally take cash value at any time.