Financial Makeover: Cashing In

Q U E S T I O N: I've been in the Marine Corps since 1979. My oldest two children keep getting into trouble with the law and this past year I've spent more than $20,000 getting them on the right track. I've used credit cards to pay for some of the above troubles. I feel I've lost control of my finances. I have been paying into a life insurance policy since 1982 which is now worth around $17,000. Would it be wise, given the current market, to cash it in and invest in stocks/bonds? I owe around $45,000 to creditors.

— James

"To surrender or not to surrender" is this week's question. In addition to an $85,000 mortgage, James and his wife have accumulated $45,000 of debt over the past few years. James has also accumulated $17,000 of cash value in a whole life policy that he has owned for almost 25 years. He wonders if he should surrender the policy and invest the net cash value in order to jump-start the family's savings program. A better alternative may be to use the cash to reduce some of the outstanding debt.

At the simplest level, there are two types of life-insurance contracts: "term" and "whole" life policies. There are many different ways in which these two types of policies are packaged and sold, but the following is a brief description of how the two vary.

A term life policy provides protection for a specified period of time (usually one-, five-, 10-, 15-, or 20-year periods). If the owner wants to renew the policy after the term has ended, the person covered by the policy ("the insured") has to requalify for insurance coverage. Also, in a term policy, the owner pays only for the cost of the underlying insurance, so the insurance premiums increase relative to the insured's age and health status.

Unlike term policies, whole life insurance contracts are "permanent" as long as the owner continues to pay the policy premiums. The premiums are determined at the beginning of the contract and aren't usually affected by the insured's changing age or health condition. Also, different from term polices, cash surrender values (CSV) accumulate in whole life polices and are available to be paid to the owner if he or she cancels the policy.