[Note: This is the second post in a series highlighting some of the financial aspects and broad economic lessons of Frank Capra’s holiday classic, It’s a Wonderful Life. You can find part one here and part three here.]
George’s Life Savings in a Life Insurance Policy
George attempts to secure a loan from Potter based on his life insurance policy. He says it has a $15,000 face value and a $500 cash value. Why is his life insurance policy worth cash?
George has a type of insurance policy—whole life insurance—that is guaranteed to remain in force for the insured’s “whole lifetime,” provided the required premiums are paid, or to the maturity date. As the New York Department of Financial Services explains,
The face amount is the amount of coverage you wish to provide your beneficiaries in the event of death. The cash value is the value that builds up in the policy. The minimum cash values are set by the Insurance Law and reflect an accumulation of your premiums after allowances for company expenses and claims. When you are young, your premiums are more than the cost of insuring your life at that time. Over time the cash value grows, usually tax-deferred, and the owner may be allowed access to that money in the form of a policy loan or payment of the cash value. The face amount of your policy will be higher than your cash value especially in the early years of your policy. If you surrender your policy you will receive the cash value not the face amount. If you die your beneficiaries will receive the face amount.
George could have cashed out the policy and received $500. But he was, as he says, “worth more dead than alive” since his family could get $15,000 if he died.