There are essentially two types of life insurance policies:
- Term life insurance
- Cash value life insurance
Term insurance is pure insurance protection and lacks a “saving” or “investment” element. Cash value insurance, on the other hand, blends term insurance with a savings or investment component.
Cash value insurance policies are sold as whole life insurance, universal life insurance, and variable or indexed-linked life insurance. A cash value life policy costs significantly more per dollar for life insurance protection than term life insurance.
One oft-quoted benefit of life insurance is the ability to borrow the cash value at any time. The life insurance company charges you interest to borrow your cash value back, although the interest rate may be meaningfully less than what a financial lender might charge, and you don’t have to give any reason to borrow or wait for a long approval process. Thus, the ability to access the cash value may be a useful source of funds to care for an elderly parent.
As cash life insurance policies—such as whole life, universal life, and variable life—all typically have a stated “surrender” value, such that if you elect to surrender the policy, the insurance company will pay out the “surrender”—essentially returning the excess investment element that you have been paying all long. Of course, actuarially, this becomes a good deal for the insurance company and a bad deal for the insured because typically an individual requiring long-term care is in poor health and likely to have a far shorter life expectancy than the average person of that age.
Yet if the cash value life insurance policy does not include a “living benefit” rider, surrendering the policy does become a way – although typically a very costly way — to pay for expenses. By surrendering the policy, you avoid the need to pay future premium payments. However, many policies contain a “waiver of premium” rider that provides for premium payments to be waived if the person insured meets the conditions (typically a meaningful disability) set forth in the policy.
For most people, surrendering a life insurance policy when in poor health is not a good economic choice for one’s family.
