freeing up cash from insurance policies

If you die your family only gets the insurance coverage; the insurance company keeps the cash value. Let's say you have a $50,000 policy with a cash value of $40,000. You are paying a premium for $50,000 for only $l0,000 of insurance. I want the cash and the insurance.

in many policies they reduce death benefit by amount of outstanding policy loans... so they still only get the 10,000

Many people buy Whole Life policies at an early age, then cash it out later in life. Then take the large sum of money and buy a single premium term life policy and invest the rest of what's left over. Other's buy Whole Life policies to simply supplement their retirement; if you think of a $250,000 or $500,000 whole life policy with paid up additions as a savings plan, then you either have a SHITLOAD of money at retirement (assuming you bought it in your 20's or have a SHITLOAD of money for your spouse or family if you happen to die before. After around year 20 or so of the policy, it basically pays for itself. You pay, for example, 400 or 500 dollars a month for it and get back 700 or 800 a month (tell me where else you can get that kind of return!). NO BRAINER!!! Either way, you enjoy the money if you retire on it or your family is set up much more financially stable than before if you happen to die.

There are many ways life policies with cash values can be useful. If you buy one with the intention to free up cash from it before 65 or so, then you may want to rethink it. Just a thought.

It depends on how well your participating insurance company (meaning they pay dividends) invests their premiums. Mine is about 5% and has been that throughout the recession.

As far as the tax you pay on withdrawals, it's taxed as regular earned income. In Louisiana, anyway.

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It depends on how well your participating insurance company (meaning they pay dividends) invests their premiums. Mine is about 5% and has been that throughout the recession.

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Okay, so at 5%, your money would double in about 15 years. 5% is actually higher than what most insurance companies provide. Most invest in either CDs or conservative bonds and provide between 2-4%. But even with your higher-than-normal 5%, your money would still be much better off in equities.

Here are the average stock market returns for various time frames:

From end-of-year 1932 (i.e., after the crash) - 2009: 11.1%
For the last twenty-five years, the annual return was 11.9%
For the last 20 years, 9.4%

Assuming 20 years is a good time frame with which to let your investment sit, we'll just call that an average return of 9%.

At 9%, your investment would double in about 8 years.

Now which is better?

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As far as the tax you pay on withdrawals, it's taxed as regular earned income. In Louisiana, anyway.

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No, no, I'm not talking about taxes. I'm talking about the interest rate the insurer charges you to "borrow" the money YOU'VE accumulated in your paid-in cash value portion of your policy. Most whole life policies provide for such a scheme, albeit in fine print, and most charge about 8% interest. Let me be clear, by interest, I mean you pay 8% of however much you "borrow" out of your own cash value to the insurer.

It's highway robbery.

Lastly, most whole life insurers take out term policies on the whole life policies they sell to you and pocket the difference. So term is good enough for them but not quite good enough for you. This is all for a reason - whole life policies are much more profitable for insurers.

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If you borrow fromthe policy instead of withdrawing you never pay tax on it

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Mostly right. You don't pay taxes on the amount that you paid in, but you do still pay income taxes on any interest/ROI you've made on the paid-in cash value. So if I pay in 10k, make 1k in interest/ROI and then borrow that 11k from the policy, I still pay taxes on the 1k. And then of course it's all subject to the insurer's own interest they wish to charge you for borrowing from the policy.

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You could also just take out a loan and not pay it back. Whatever you owe plus interest will simply be taken out of the death benefit your family gets if you die.

And also, the interest rate that I pay if I choose to make a loan is 4.8%; not as high as 8%. I have State Farm insurance. They are by far the best in the business!

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So they make you 5% and then you pay them about that to borrow against the cash value. Now what is the point of that when you could be making 9% over that same 20 years but be charged nothing for taking your money out, apart from income taxes, which you would also pay for gains on money from your paid-in cash value.

Also, you'll be charged over and beyond that 4.8% because they also charge you fees for no longer having your money to invest. See, when you pay 10k into the cash value portion of your insurance policy, you are basically guaranteeing them they'll have that money to collect interest on for themselves. When you rid them of this ability to do so, you pay for it.

Sure it's not a bad deal I guess. But it's certainly not the best bang for your buck given historical stock market returns.

"But it's certainly not the best bang for your buck given historical stock market returns"
tell that to everyone who invested in the market and retired at the end of 2008.
Life policy cash is guaranteed and a great idea if you can afford to pay high premiums.

And also, who says you have to make loans on the cash value?? Just take your cash and pay income taxes on it. Think of it as getting a large raise for one year lol!

I do believe in investing in the market also though. Just don't put all your eggs in one basket.

From a segment entitled, "Money 101", done by CNN Money:

LINK

1. All policies fall into one of two camps.

There are term policies, or pure insurance coverage. And there are the many variants of whole life, which combine an investment product with pure term insurance and build cash value.

2. Insurance is sold, not bought.

Agents sell the vast majority of life policies written in the U.S. because the life insurance industry has a vested interest in pushing high-commission (and high-profit) whole-life policies.

3. Whole life is expensive.

Policies with an investment component cost many times more than term policies. As a result, many people who buy whole life often can't afford an adequate face value, leaving themselves underinsured.

4. Whole-life policies are built on assumptions.

The returns quoted by the agent are simply guesses - not reality. And some companies keep these guesses of future returns on the high side to attract more buyers.

5. Keep your investing and insurance strictly separate.

There are better places to invest - and without the high commissions of whole-life policies.

6. Buy enough term coverage to fill your needs.

Life insurance is no place to skimp, especially with rates at historic lows.

7. Match the term of the policy to your needs.

You want the policy to last as long as it takes for your dependents to leave the nest - or for your retirement income to kick in.

8. Buy when you're healthy.

Older people and those not in the best of health pay steeply higher rates for life insurance - so buy as early as you can, but don't buy until you have dependents.

9. Tell the truth.

There's no sense in shading the facts on your application to get a lower rate. Be assured that if a large claim is made, the insurance company will investigate before paying.

10. Use the Web to shop.

Buying life insurance has never been easier, thanks to the Internet. You can get tons of quotes - and avoid the pushy salespeople.