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Cash Value/Dividend Accumulation in Small Whole Life Policy

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  • Cash Value/Dividend Accumulation in Small Whole Life Policy

    My parents took out a $25K whole life insurance policy on my life when I was 10.  At some point they gave the policy to me and I have been paying the $180/year premium for a while now without really giving it much thought.  I am now 42.  I just got my most recent bill and it says that the cash value is $5704.50 (an increase of $294.25 from last year).  It also says that I have (unknowingly) elected to leave dividends with the company to accumulate at interest.  It says my total dividend accumulation is $3082.12, and that this includes interest at a 4.5% rate of $131.27 and a current dividend of $33.75.

    My wife and I each have $1 million 20 year term policies that we took out 8 years ago when our daughter was born, so we don't need the insurance aspect of this policy (and probably don't even need the term policies any more based on our net worth).

    I have several questions:

    1.  What is the difference between dividend accumulation and cash value?  If I were to surrender this policy, would I get the sum of the two (so a little less than $9000), or are the dividends included in the cash value?

    2.  Is it really possible that I am earning 4.5% on the dividends (or on the cash value)?  If so, shouldn't I just leave this small amount here and keep adding $180/year seeing as that is 4% more than I could get in a bank account?

    3.  Does anyone have any idea what the tax implications of surrendering this policy and taking whatever cash/dividends?  Is it all tax free or is it treated as ordinary income or dividends?

    Thanks for any input.