Let's start by thinking of the "cash value" of a whole life policy differently. (I've been guilty of this in some of my posts in trying to help people understand this, but let's try again.)
A whole life insurance policy does not have "cash value". We need to call it by it's proper name "Cash Surrender Value". The Cash Surrender Value is how much the insurance company is willing to give to you if you surrender your policy. Until you surrender this policy, the money does not belong to you. However, it can be counted as an asset since it can be turned into cash at any time.
When one accesses money from their insurance policy, they ARE NOT borrowing from the cash surrender value. They are borrowing from the death benefit. These difference may sound like semantics, but they are critical if one is really going to understand these products.
I've allowed myself to get into rates of return discussions, but the fact is that the rate of return of a life insurance policy really depends on year of death (along with other factors).
If you buy a Vanguard Mutual Fund, you always know the value of your holdings. It is the Net Asset Values of the holdings. You don't have to know your holdings. You can simply go on line and see that your fund is worth $337,695. Assuming no back end sales charges, you know that you can redeem your shares at anytime and get $337,695 (+/- fluctuations that day). What if you tried to get someone to buy this from you? Could you get someone to pay more for this? No and there is no reason for someone to pay less. You know the exact value.
If on the other hand, you own a closed end fund, the NAV doesn't matter because it is not redeemable. You must sell it to someone who wants to buy it. It gets sold on the open market and you may get more or less than the NAV.
Now let's look at life insurance with a cash surrender value of $337,695 and a death benefit of $1,000,000. Is the value of this asset if you want to sell it $337,695? No. The value of this asset, like any asset is exactly what someone is willing to pay for it. Look at the Cash Surrender Value (CSV) as the amount that the insurance company is willing to pay. What if we add some facts. The insured is 80 years old and in poor health. Is the value of this policy worth more than $337,695? Absolutely, because instead of surrendering it to the insurance company, the policy can be sold to a third party for more than the Cash Surrender Value. The value of all assets are based upon what one will pay. The value of life insurance at any time is based primarily on the death benefit and the health/age of the insured and not the cash surrender value.
The Cash Surrender Value is nothing more than the amount of money that the insurance company will give to you if you surrender your policy. This is the least possible that your policy can be worth.
Do you believe the following statement?:
"With whole life insurance, some of the money goes to pay for the insurance and some goes into the cash value?"
There is no separation. It is true in a universal life policy, but not in a whole life policy. In a whole life policy, all of the money goes to the insurance company to pay the premium and all expenses. Based upon profitabilty you will receive a dividend in relation to how you contributed to this profitablity.
How about this statement?:
"The cash surrender value is the amount of money that a person will get if they don't want their policy any more"
It's a bit of trick, but if you believe that, you don't understand whole life insurance.
It's a trick because the cash surrender value is the minimum
that one can get since they can either surrender the policy to the insurance company or sell it to a 3rd party.
And this one?:
When you take a loan from your policy, you are borrowing money from yourself.
If you believe this, you don't understand whole life insurance.
As I've mentioned you are borrowing from the death benefit and not from money that belongs to you. The money only belongs to you if you surrender your policy. Why does interest need to be charged? For simplicity, let's pretend that life insurance companies only invested in bonds. You have a policy with $300,000 of CSV and $800,000 of death benefit. You decide to borrow $100,000 out of your policy because you want to invest in XYZ corp.
Let's look at this from the insurance companies point of view. In order for you to have this $100,000, they had to pull it out of one of their investments. If their typical investment is earning 6%, doesn't this loan cost them $6000? The insurance company charges interest because from their POV, lending money to you is identical to having the money invested in a bond. Because it is identical, your policy will perform as if the money was never removed (depends on the company).
Keep thinking that WL insurance sucks if you want, but you should really keep trying to understand it first. I'm happy to answer questions and stay with this conversation.