Life insurance is a vital part of your family’s future. Taking out a good policy early in life can help to ensure that your spouse and children will be taken care of if the unthinkable happens. While that alone is reason enough to take out a life insurance policy, benefits are available from good coverage plans that you can benefit from almost immediately, such as borrowing against the cash value of your policy to pay for the items you need today.
Understanding Whole Life Insurance
There are basically two types of life insurance policies, term life and whole life. Term life insurance does not accumulate cash value and only provides benefits for a short period or “term.” Whole life insurance, also known as permanent life insurance, provides death benefits and allows you to build up a cash value that you may borrow against as needed. This type of insurance can help your family out in the event of your death and provide you with a dependable financial resource that you can use any time you may need it.
Should I Borrow Against My Life Insurance Policy?
One of the main reasons why people choose to take out whole life insurance is because they can borrow against their policy. However, is borrowing against your life insurance policy always a good idea?
Borrowing against your policy can be helpful if you need to make a big purchase such as a car or a down payment on real estate. Many individuals may choose to borrow smaller amounts to do home repairs. You can even pay credit card premium with life insurance cash.
However, you should keep in mind that whole life insurance plans often cost much more than term life insurance, because the additional fees help you earn cash value and building up a reasonable amount can take time.
Life Insurance Companies are in the Business to Make Money
A common misconception among policyholders is that when they borrow from their life insurance cash value, there are no strings attached. However, that is simply not the case. When you withdraw money from your policy, the company no longer has that money available to invest or pay for other beneficiary claims. Therefore, they must charge you interest to make up the difference.
When you borrow against your cash value, you are not obligated to pay the money back. Although that may sound like a completely beneficial option, a greater risk is involved despite the lack of requirement to pay the money back. The interest on your cash value will continue to build and be taken out of your death benefits, which means your loved ones will receive less money from the insurance company when you are gone.
Once you borrow a lump sum of cash, it will be a while before you have that amount available to you again. Therefore, you should always borrow with caution. Make sure that you only borrow against your life insurance policy when it is necessary.