Life Insurance

Life Insurance

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Drawing against your life insurance




Life insurance comes in two basic varieties; term and whole life. Term insurance is designed to provide you with cover for a set period of time, while a whole life policy is meant to be a lasting asset. Term insurance is much less expensive, but accrues no value over time, you are paying for the coverage only and not setting aside anything for growth. In many circumstances, this is a better type of cover, and a term policy may be wise if you have young children or are at the beginning of a mortgage commitment. Whole life on the other hand, is more expensive. That's because part of your premium is meant to buy a death benefit, and part of it is for savings and investment. You accrue value over time, and this value can be used like any other asset.

Whole life policies are meant to be long-term investments however, and for the first several years, the cash value of your policy will be small. Usually you need to have a life insurance policy in place for at least ten years before there is enough value to draw against. Like term life, whole life does have a death benefit, but unlike term life, premiums usually do not increase with age unless you choose to increase the value of your policy.

If you do choose to borrow against your life insurance policy, there may be a fee for doing so.

In deciding whether or not to borrow against the cash value of your life insurance, consider the options. If credit challenges would make a conventional loan impossible, or would mean you would have to pay a very high rate of interest, taking advantage of your life insurance asset may well be a wise choice. Typically, you may have the choice of merely "cashing in" some or all of the value, and not repaying it; or just borrowing against it and repaying the loan to your fund over time. Again, look at the relative cost of money. Borrowing against your life insurance means you are borrowing against an asset, which will likely result in a lower rate of interest for the loan than you would be able to obtain otherwise. But if prevailing bank interest rates are low when you are in need of funds, compare the difference; if you can obtain a bank loan at an equivalent interest rate, it would be best to preserve your life insurance asset and take the bank loan instead. Or speak to a broker and compare your options.

Many whole life policies will have a loan provision written into it, so when you buy the policy be sure to check the provisions. There may also be a provision as to how much of the policy's cash value you may borrow, typically you cannot borrow the entire amount without canceling the policy, but you may otherwise be able to borrow as much as 90 percent of its value.

Of course, if you die before the loan is repaid, the death benefit will be reduced by the amount due.

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