One of the advantages of a whole life insurance policy is a non-forfeiture value found in the contract. It is the guaranteed cash value available which the insured can draw upon before the policy reaches maturity.
Some insureds and some agents have had the misunderstanding that the amount of cash value shown is owned by the insured. It actually is not. What it is, however, is the contractual right to borrow against the general funds of the insurance company up to the amount of cash value minus the first year’s interest on the loan. Even though the insured has the right to borrow against the stated cash value, the insurance company has the right to hold back the loan payment for a specific time. This provision helps to stabilize the outlay of money in the event of a market panic.
The value of that provision was evidenced in the stock market crash of 1929. Banks and other financial institutions who held money for their depositors were required by the regulations they were governed under to “upon demand” honor withdrawal demands immediately. This along with the abnormal amount of margin calls in a short period of four days caused the banks to crash.
From late 1929 to 1933 11,000 of the nation’s 25,000 banks disappeared, with an estimated 1.3 billion dollars loss to depositors. On the other hand, the life insurance industry survived, with only 20 out of the 350 companies, approximately 5.7%, going into receivership.
Of clients affected by the receivership status, almost every one of them received their cash value due to the reciprocity stance in the insurance industry. (This is according to a study called “State of Life Insurance Industry” authored by Anne Obersteadt and sponsored by NAIC (National Association of Insurance Commissioners) and the Center for Insurance Policy, with information being retrieved from BEST Insurance Education Company http://www.bested.com/studyguides/NMIL-IUS/NMIL-IUS.pdf
One of this author’s favorite sales illustrations is a picture of a mob of people trying to get into a bank to get their money. They are pounding on the door while horrified bank employees stand on the other side of the door fearful of what will going to happen if the door breaks down. The other side of the picture is a scene in front of the New York Life home office where a desk iss set up on the sidewalk attended by employees. They are calmly taking clients’ withdrawal request while handing out promissory notes redeemable within six months of date of issue. The last scene showed a big “closed” sign across the door of the bank and a big “open” sign on the front of the insurance company office. Because of industry self imposed guidelines, less than 2% of life insurance companies went into bankruptcy while a majority of the banking institutions succumbed to the panic. Cash value is one of the miracles of whole life insurance!!!