Why would people want to put their savings in life insurance?

Question

And when they want to take it out, its not a withdrawal but a loan? What kind of insurance scheme is this?

Answer 1

Because majority of people don't understand the concept of life insurance or even know how these life insurance policies work.

There are two types of life insurance. There is a life insurance that builds cash value, which is the one you are asking about, and the other doesn't build cash value. The one that builds cash value is called "cash value life insurance" and the one that doesn't build cash value is called "term insurance."

In my professional experience, cash value life insurance is the biggest ripoff in the entire insurance industry. In the 1990s, many life insurance companies were sued for lying and misleading the public on the general workings of cash value life insurance. Agents illegally call it a great investment or it provides income for retirement. Here's the real truth behind cash value life insurance:

1) They are very expensive. An average person spends about $1000/year for less than $100k of coverage. With a 30 year term insurance, people can buy the same coverage for a very low price.

2) If people wanted to take money out, they have to borrow it and pay loan interest on it. Thats like you going to the bank, withdrawing money from your savings account, and the bank charges you monthly interest until you put it back.

3) They get a very low rate of return. On average, a life insurance policy gets 1-4% rate of return.

4) In most life insurance policies, if you die, the insurance company pays the death benefit, but keeps the cash value.

If people knew this information, they wouldn't buy it. But agents that sells this (as you can see from the other answers) makes this product look really good, when it's really isn't.

I have always sold term insurance from the beginning and help clients find ways to free up money so that they can invest for the future. Lets say I have a 3 year old child. I bought a 30 year term insurance. In 30 years, my child would be 33 years old. I'm counting on my child to be independent and not depend on my income anymore. During those 30 years, I would be investing on a consistent basis. Right now I invest $333/month. I don't know what my average rate of return is going to be in next 30 years, but in the past, it has average out to 12%. My goal is to become financially independent. That is the same goals I want for all my clients. In 30 years, do you think I really need life insurance? My kid(s) are independent, I have large sum of money saved for retirement, and I really don't have any large debts to pay.

Answer 2

idk

Answer 3

They do it because they were told they could use it for retirement, repairs, vacations, etc tax free.  What they were told is that the money is not theirs per say to use.

This is called cash surrender value.  Notice the word surrender, it is usually left out.

Answer 4

its a great vehicle to save money and buy insurance too! after four years the policy will pay for itself if you set it up that way...cheaper than buying term! no sceme here check it out with a CLU...

Answer 5

Well, people want to, because they are bad at math, and don't understand exactly how it works.  They're being sold a product, and being told it's an "investment".

It's pure mental laziness.

Answer 6

One good reason would be that they can have more favorable tax treatment, than other investments when you die.  Estate taxes are brutal.

Otherwise, life insurance in general rarely favors the buyer.  There is a reason they can afford to build such big skyscrapers in big cities.

Answer 7

the other answers are basically correct, but let me clarify. In most states, proceeds from life insurance policies (death benefits paid after the policyholder dies) are taxfree.  Ditto the value of annuities, at least in Florida. Savings are lumped in with the estate and subject to probate. When it talks about a "loan", what they are saying is if you have $50,000 cash value in your policy (not the death benefits, but the actual cash value that it has built up over the years), you can use part of that to fix a roof, etc etc., The payback of that "loan" is at usually 3 or 4%. But, if it isn't paid off, whatever hasn't been paid off will be subtracted from your death benefits should someone die. For example, if you have borrowed $5,000 of your cash value on a $100,000 policy, and you die, your beneficiaries will receive not $100,000, but that amount LESS the $5,000 and 3% interest, or around $92-93K, depending on how old the loan is. Hope this helps. It isn't a scheme at all. In fact it is a way to use your cash value while you're still living to enjoy it.

Answer 8

In a word, security. The return may be small, but it is guaranteed. You can earn more elsewhere, but the returns are not guaranteed. In addition, the death benefit is not taxed if the beneficiary is a person, not an estate.

Answer 9

It allows one to protect assets and get a larger death benefit than the amount they saved. They can use any built up cash value to secure a loan. It actually is very beneficial to the insured because they pay back the loan at a very low interest rate. I think 6% is about the current rate, but they still earn the interest on the cash value the borrowed usually about 3%. Try to get a loan anywhere else for a 3% net. Plus, they get the face value minus the loan amount as a benefit to the benificiary if they die.