George Bailey’s life insurance lesson

By Allen Wastler
Allen Wastler is a former financial journalist with over 30-years of experience, including time at CNBC, CNN, and Knight-Ridder Newspapers.
Posted on Dec 19, 2017

The movie “It’s a Wonderful Life” is a heart-warming tale of mutual support — people coming together to help someone in need, someone who helped them before. That makes it a holiday classic. But there’s a subtle financial lesson in the story as well. And it’s about life insurance.

For those unfamiliar with the Frank Capra holiday film, the movie traces the life of George Bailey, a man who from his childhood through his adult years sacrificed personal dreams and ambitions to ensure the well-being of his community. He’s hit with a financial crisis and, after some divine intervention, is saved by the community he served for so long.

It’s during that financial crisis that life insurance comes up.

“In the movie George Bailey is a family man and a business leader,” pointed out J. Todd Gentry, a financial advisor with MassMutual St. Louis. “As a family man, he apparently wanted to ensure his family’s well-being and so had the policy in place in case something happened to him. But as a business man, he recognized it as an asset that could be used in the present day. That’s something a lot of people don’t realize.”

Here’s the scene. Owing to some incompetence and malice, Bailey needs $8,000 to save his business and keep from going to jail. He goes to the town’s richest man, Mr. Potter, for a loan. And one of the things he offers up as collateral for the loan is … an insurance policy with a death benefit of $15,000 (that would be close to $200,000 today).

It helps to know some things about life insurance to fully understand what’s being offered. For one, Bailey likely had a whole life policy, rather than a term policy. Whole life insurance policies build up cash value over time. Term policies, while less expensive, don’t offer a cash value component.

A loan from the cash value can be made at any time and for any reason. Of course, there are risks for doing so. The death benefit could be reduced or the policy could lapse. And even though Bailey was in a tight spot, many financial advisors caution against using a policy’s cash value to cover short-term debt obligations. (Related: Treat your cash value with care)

Potter asked about the cash value component, which apparently added up to $500. That was not enough to cover Bailey’s problem, otherwise Bailey wouldn’t have had to go to Potter in the first place. (Of course, Bailey could have offered to make Potter the beneficiary in exchange for a loan ̶ but those aware of Potter’s character would likely caution against it.)

This also offers up some information about the life insurance policy involved. Bailey probably obtained it relatively recently, since the cash value hadn’t built up to a significant level.

“I had a client whose father had a whole life policy on him and turned it over to him when he was 25 years old,” said Gentry. “He didn’t cash it in. He later took loans from it to buy a billboard, his first one. Now he owns 25 billboards and they bring in about $8,000 a month for him. It pays to have it early.” (Related: Making a gift of life insurance)

But in the context of “It’s a Wonderful Life,” the life insurance policy doesn’t save the day; it’s merely a jumping off point for Mr. Potter to mock Bailey and suggest that he’d be worth more dead than alive.

That leads to Bailey’s inner struggle and ultimately to the overriding message of the movie: a person’s life touches many other lives and everyone is better off for it.

And that’s a message of mutual strength that MassMutual strongly believes in and supports (self-interest in the mention of life insurance aside).

Happy holidays!

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The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own, and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.