What's the point of having cash value in a life policy?

Question

True story: A friend of mine came up to me and started talking about this life insurance her husband had. Her husband died recently at age 55 and she filed for a death claim. It was a $100,000 face amount and there was about $22,000 of cash value sitting in the policy. The company paid her $100,000 a month later.

While that's good, she ask the company why she didn't get the $22,000 too? The company said the cash value belongs to the company and as stated in the policy, all cash value will be forfeit to the insurance company upon death of the insured. She was like really pissed off about it and that's why she told me her story.

So, why have cash value in a policy if you are going to lose it all upon your death?

Answer 1

There's no point of having it. It's a way for the insurance company to make lots of money when the insured is living or dying. Everytime you pay your premiums, a portion of it goes to the cash value. The insurance company will invest this cash value in their own accounts to make more money off of it. They give you a gurantee interest of 4%, but they get a rate of return of 8-12% on it. They make even more money when you borrow it and pay a monthly loan interest of 5-8%.

If you surrender the policy, they penalize you for doing it by putting a surrender charge on the cash value and you may owe income tax on it as well. If you die, you lose all the cash value!

See where I'm getting at? The cash value belongs to the insurance company in which you can borrow at anytime. It does not belong to the insured.

Answer 2

A complete answer to your question is too complicated for a message board.

Rich is correct in that life insurance becomes very expensive at older ages. If your friend's husband had lived another 30 years, the cash value would have helped pay the high costs of insurance when he reached his 70s and 80s.

Term insurance - the kind mbrcatz sells - works well IF the insured is guaranteed of dieing within the term OR if the insured has so much savings that he/she will be able to pay all of the expenses that occur late in life - medical bills, nursing home bills, final expenses - as well as leaving his/her spouse in OK financial condition. Many company pensions stop at the retired worker's death leaving the surviving spouse with little income.

Less then 5% of term policies pay a death claim. The insured outlives the term or drops the policy. The insurance companies love these.

Your friend and her husband COULD have set up the policy to pay BOTH the $100,000 death benefit AND the $22,000 cash value.

Since you have a lot of confusion in this area, I urge you to go talk to a few insurance agents and financial planners so you receive a clear understanding of your financial picture and have adequate coverage.

Good Luck

Answer 3

THe cash value is the money yher dad paid into the policy- All those premiums over the years. You should be happy the cash value didnt even come close to the face value. As we all know- "life happens" and the cash value is able to be withdrawn from the policy should you need it. Should you not return that money that you borrowed than the face value of the policy goes down. And why didnt the company give your friend that money? Because that was all the money the company got! When you look at it like this you will understand...
THe company paid your friend $100,000 after her father's death even though her father only paid the company $22,000. If your friends family and the insurance company were playing poker it would almost be like the insurance company just lost $78,000. I hope this helps

Answer 4

Critics of permanent life insurance believe that it is better or cheaper to "buy term and invest the rest". This would mean that you determine how much you would be paying for a permanent policy and invest that amount minus the amount that you are paying for a term policy into mutual funds. Studies show that less than 15% of people that buy term insurance invest the difference.

Imagine if you had tried to keep $100,000 of life insurance until death and you didn't die until age 85. The cost of term life insurance would skyrocket, while the cost of permanent life insurance would never go up.

Answer 5

The purpose of cash value is to keep the premium level through out the life of the policy. Without cash value it would be term insurance and the premium would go up as you age. There is a misconception that the cash value should belong to the insured, but it is there to maintain the level premium.

Answer 6

Whole life insurance is extremely profitable for insurance companies, and a great investment vehicle for consumers who are really bad at math.


In other words, I NEVER sell it, it's a ripoff. AND, if he had BORROWED against it, they would have subtracted that amount from his face value payout.