Life Insurance as an Asset – And Source for Loans?

If you are considering purchasing life insurance, your biggest decision is whether or not to get a term life policy or a whole life policy. While there are many varieties of life insurance policies – knowing whether you want a term or whole life policy is your first and most important decision to make.

Term Life Insurance Policies

Term life insurance offers a death benefit if you should pass away within a pre-determined number of years. Because it is limited to a specific time period, term life insurance policies are among the least expensive forms of life insurance. At first, you may wonder why anyone would spend money on a temporary life insurance policy – but it’s suitable for younger people who have families at home but maybe don’t have a lot of cash to buy a more expensive policy; or for individuals who have just purchased a home and worry about leaving the burden of the home expense to their spouse if they should die before the mortgage is paid for. Term life insurance policies offer no cash value.

Whole Life Insurance Policies

A whole life insurance policy offers both a death benefit and cash value to the policy holder. The monthly premiums for whole life policies are higher than a term life policy, but it is considered an asset – which means you can borrow against the policy in an emergency. If you do borrow money against your whole life insurance policy, your death benefit is reduced by the amount you borrow if you should die before it is repaid; or if you cash in some of the policy’s equity, the value of the whole life policy is reduced proportionately before the remainder is distributed to your beneficiaries.

Whole life policies do not work like savings accounts, in that you can borrow as much as you pay toward your premiums. Part of your premium accumulates into an asset over time, while part of it is used to pay for the death benefit. For most policy holders, their will not be a significant amount of money earned for the first three to five years you have your policy. In the case of children however, whole life policies purchased for a child who is young can be a significant amount of money when the child becomes an adult.

When the asset has been built in your whole life insurance policy, you can choose to use it as collateral for a loan – any time you need to secure a loan or financing, you can often use your whole life asset as collateral. If you don’t want to secure other financing using your asset as collateral, you may have the option of withdrawing the equity as a loan. Loans taken from your whole life policy must be repaid like any other loan, although you will often get a very good interest rate because the loan is secured against a solid asset.