FUNNY BANKING
What do I mean when I use the term "funny" banking in reference to cash value life insurance? Do I mean that a whole-life policy is similar to a savings account at a banking institution? Of course not! What I do mean is that the vast majority of people who buy and those who sell cash value life insurance do so because they believe (or are led to believe) that owning such a policy is a good way to save for the future.
To illustrate the differences beween cash value life insurance policies and bank accounts, and why the former has always been such a dismal vehicle for any useful savings program - and is even more so with inflation - I invite you to imagine the following scanario. Suppose that you were to go to an institution named "The First Funny Bank of America" and told the polite man inside that you wanted to open a savings account. And suppose he said to you, "We're happy to have you, and here are our rules: First, you must buy term life insurance with us to open your account. Second, in addition to what you pay us for the insurance, you must deposit a certain number of dollars into your account for each unit of insurance that you buy. Third, we'll take everything that you deposit into the account the first year and keep it for ourselves. After that, we'll charge you to deposit money into your account. If you want to borrow from this account, we'll charge you 5.5 percent to borrow this money. If you should die while this loan is outstanding, we'll subtract it from the amount that we'll pay your beneficiary. If you refuse to pay us for the privilege of borrowing from this account and withdraw from the account, we'll cancel your life insurance policy. If you do not borrow from this account and should die, we will not pay your beneficiary the face amount plus the accumulated deposits, but only the face amount."
If the bank had said all of these things to you, would you have opened the account? Think carefully about your answer, because I have just described some of the end results of a traditional cash value policy. (emphasis is ours)
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