ABC Insurance will pay the entire $25,000 death benefit upon Mr. Smith’s death. Due to the $10,000 in accumulated cash value, the business will only suffer a loss of $15,000.
The total amount of risk was $25,000, but at the insured’s death, it was only $15,000.
The majority of whole life insurance policies include a withdrawal clause that enables the policyholder to either cancel coverage and receive a cash surrender value or withdraw all of the cash value.
Whole life insurance was the most popular type of insurance from the end of World War II until the late 1960s. Policies subsidized retirement planning and provided families with income in the event of the insured’s untimely death.
Many banks and insurance companies became more interest-sensitive after the Tax Equity and Fiscal Responsibility Act (TEFRA) was passed in 1982.
People weighed the advantages of buying whole life insurance against investing in the stock market, where annualized return rates for the S&P 500 were 14.76 percent in 1982 and 17.27 percent in 1983, after accounting for inflation.
At that point, the majority of people switched from whole life insurance to investing in the stock market and term life insurance.
