Is like a special savings account?
In: Economics
Most insurance products reily on an event that likely won’t happen but if it did would be costly. Think like a car accident.
The “math” of insurance is that you can receive more than you’ve paid in but it relies on a rare event occurring.
Back to car insurance, lets say you have a $30,000 car and pay $100 a month in insurance. If you crash the car on month 1, you get $30,000 and the insurance company loses $29,900. If you crash it in year 10, you get $30,000 (not really, but lets just assume for this example) and the insurance company loses $18,000 ($12,000 in payments at $100 a month over 10 years).
The insurance company above only really makes money if you never wreak the car (or they charge a higher premium) and since most people never wreak a car the auto insurance company ends up being profitable.
But everybody dies eventually. So how can life insurance be profitable?
The answer is that there’s basically 2 kinds of life insurance. 1st kind is where they only pay out if you die in certain kinds of ways, such as an accident, but not something like illness. The other kind of life insurance runs more like an investment account than an insurance product.
With this product you pay a monthly fee, the insurance company puts most of that fee into an investment account (they keep as small cut for profit). Then when you die they give you what was in that investment account.
The core meaning here is that it’s impossible to receive more than you’ve paid in. Since everyone eventually dies, the insurance company makes it’s profit off of the small fee they take from each payment.
To be sure clear, this is unlike other insurance because with other insurance the company makes it’s profit when the insured event doesn’t happen. People who pay for car insurance but never get in an accident. But everyone dies.
Now you might see the answer to your question baked in right there. With this kind of life insurance, you can ask for your money back at any time. You take a loss since there’s fees for taking the money out while you’re still alive. But it’s possible and that’s basically what cashing out life insurance is at it’s core.
all insurance is a bet. “I bet you X wont happen, if it does, you will pay me Y. To make it worth your while, I will pay you Z indefinitly”
for life insurance you bet you wont die and pay Z every year you are alive. When you do die, your life insurance pays out Y. Obviously it cant pay out while you are alive, because payout is conditional on you being dead.
its almost exactly the opoosite of a savings account. its a guarenteed amount of money that doesnt change no matter how much you pay into it, but is always full, but you cant access it
There are products that are disguised as life insurance (because they have a life insurance *component)* but are really high-fee investment vehicles that are generally not suitable for 99.9% of the population out there. The ‘cash out’ is a feature of the investment part of the policy.
If you want life insurance, buy term life insurance. Invest the difference. Anything else is going to eat you up in fees.
There are two types of life insurance, whole and term.
Term life insurance is basically “You pay X premium and if you die while you are covered, your heirs get Y”. So, you pay $200 a year or whatever, and your kids get a quarter million dollars if you die. Obviously this goes up as you get older.
The other kind is whole life which is basically a scam but not completely. Essentially it’s just an investment account that is invested in treasuries or something similar. Every month, they pull out a term life insurance fee from it. In other words, you could just have a brokerage account and a term policy and do the exact same thing yourself. To make it even worse, they have really high management fees typically while a brokerage account usually has none.
To make it worse, they often prey on old people and have them take out policies against their children and grandchildren when they think they are taking out a policy against themselves.
Now to answer your question, because a whole life policy is nothing more than an investment account with high fees and mandatory withdrawals for a term policy, you can cash it out at any time for its face value.
There is types of life insurance that let you go “I don’t want this anymore” and they will give you back less than the payout but more than you put in because it was invested (but less than If you regular invested). This is used as a weird tax loophole or when you are desperate for money
It’s a “feature” of certain types of life insurance products such as “whole life” or “permanent life” insurance. In comparison to ordinary term life insurance, these products charge higher premiums and build up a value over time. If the policy holder cancels the policy, then they get back all or a portion of that value that is built up.
In general, they are a bad idea for most people because the investment returns are relatively low, and a large part of the initial contributions go into commissions for the insurance salesperson. So, most people would be better off buying a term life policy and then separately investing the extra. But, because of those commissions, insurance agents love to sell these policies.
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