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How does whole life insurance work?

Here is my main question: If I have a whole life, Life Insurance Policy and the face value is $100,000 and the Cash Value is $112,000 and I die, does my beneficiaries get the $100,000 or the $112,000? Anything else I need to know about whole Life policies would be appreciated too. If my premiums are invested and the rate of return is high enough, why couldn't my cash value be $112,000 or just higher than the coverage amount whatever it is?

Public Comments

1. The cash value of a $100K policy will NOT be $112K. The cash value is predetermined according to the policy years in force by a table contained in the policy itself. It is not like an IRA investment account. Your premiums are not "invested" in a segregated account for you. See the life insurance section at Yahoo Personal Finance.
2. Neither, you'd probably get somewhere between $130,000 and $150,000. The death benefit will always be greater than the cash value. I think what you meant to ask is if it's worth $12,000 do you still only get $100,000 and why don't you get $112,000? The answer to that question is that a policy with cash value is structured is such a manner that when you have $12,000 in cash, you're only buying the difference (in this case, $88,000) of insurance. So, as you age the cost of insurance increases (because you're life expectancy is getting shorter), but the cash value increases to offset the increased cost. A whole life policy is just packaged in such a manner that everything is built in and guaranteed. You can actually see the workings of a life insurance policy by looking at a universal life statement year after year. And, to counter what the above answerer said, it is possible for the cash value to get higher than the original face value if the policy pays dividends that you leave in the policy to buy additional insurance. The base policy without the dividends is designed to equal the $100,000 when you're 100 years old.
3. All of these answers missed the mark to a degree. Insurance Pickle clearly provided the best response. Finance101, as usual, gave the worst. The reason F101's was poor is not because it was "wrong," but because it was unnecessarily wordy and irrelevant to a true understanding of whole life. As he summed up the post in a brief pro/con section at the end, this is what I'll address. The pros are what they are; enough said. The "cons," however, show his complete lack of comprehension of the product: 1) It builds cash value, which makes this type of life policy very expensive. Premiums for whole life are higher than term for the same reason that premiums for a 20-year level term are more expensive than for a 10-year. They are the result of averaging mortality costs over the remainder of the insured's lifetime (including when he is very old and expensive to insure) rather than a shorter period ending at a younger age. To say that whole life is "more expensive" than term is akin to saying that a new car is more expensive than a candy bar. Apples and oranges. 2) Cash value grows at a low rate of return Not at all. Cash values in whole life policies have historically grown at a rate extremely favorable for fixed instruments. They are right in line with any well-managed high-grade bond portfolio. 3) If you want to use the cash value, you have to borrow it and pay loan interest of 5-8% Yes and no. When you borrow against cash value, you are NOT removing that cash value from the policy, you are merely collateralizing the loan with the cash value. While you are paying very modest interest on the amount borrowed, your entire cash value is still receiving a similar amount of interest within the policy. It is nearly a wash (typically no more than a 2% difference). Comparing that with taxes you would pay on gains in a conventional investment vehicle; the whole life policy comes out far ahead. 4) If you die, the insurance company keeps your cash value. The insurance company doesn't keep anything that wasn't an actuarial cost of insuring the insured's life. For any level premium policy, be it whole life or term, excess premium is paid early in the policy's existence in order to compensate for insufficient premium paid later. This is further calculated actuarially to ensure that the early accumulation of cash value does not constitute an excessive windfall to the insurer. If this is a great concern, simply purchase a universal life policy instead, using the increasing death benefit structure, where the policy pays the face value plus the cash value. If an insured dies in year two of a 20-year term policy, is the excess premium refunded? Of course not. This is the same principle.