Interest Rate Risk

• Interest rates affect life insurance policies in a variety of ways. They can affect certain types of whole life policies known as "interest-sensitive whole life." Interest-sensitive whole life insurance pays interest based on current interest rates. If interest rates fall, this could hurt future projected cash values in the "non-guaranteed" column of the illustrated cash value rates.
  
  

Investment/Dividend Yield Risk

• Some whole life insurance policies use dividends to increase the cash value of the policy beyond the guaranteed cash value accumulation rate. The danger in relying on dividends for growth is that some agents and insurance companies actively promote the idea of "vanishing premiums."
  
  The concept of "vanishing premiums" was at one time used to illustrate the life insurance premium being paid by accumulated and current dividends. Because many life insurance policies are payable to age 100, these premiums are due for the entire term of the contract. Dividends, however, gave the illusion that the premiums could "vanish" and the policy would be "self-completing," requiring no further premium payments by the policy owner.
  
  Although most dividend-paying whole life insurance consistently pays dividends, the amount of the dividend can vary. Dividends, as such, are never guaranteed. If the dividend is not enough to pay the premiums, then premiums could be due in the future. Policy owners might not have budgeted for this expense if they assumed that dividends would definitely cover future premiums.
  
  

Lapse Risk

• There is always the risk that the insured will allow the policy to lapse. If premiums are not paid on a whole life policy, and if the insurance company does not borrow money from the cash value to keep the policy in force, then the policy could lapse. A lapsed whole life insurance policy could trigger income tax due on any gains in the policy.
  
  

Insurer Structure Risk

• An uncommon risk associated with dividend paying whole life insurance is the risk that the insurer will demutualize and stop paying dividends. Dividend-paying whole life insurance relies heavily on the fact that the insurance company has a mutual structure. This structure encourages the insurance company to seek maximum profits for its policyholders.
  
  However, if the company demutualizes, it will become a stock company. If this happens, the company might stop paying dividends. Because dividends are a critical part of a dividend-paying whole life insurance policy illustration, this could leave the policy owner with a policy that will significantly underperform expectations.
  
  

Misconceptions

• A common misconception is that there are no risks associated with whole life insurance because it offers guaranteed cash values, a death benefit, and generally a level premium payment for the life of the contract. However, various risks and dangers do exist, as they do with any kind of financial product. The policy owner must understand that a whole life insurance policy illustration is just an illustration to show how the policy works. It is not a guarantee of performance.