Can you borrow money against your life insurance? If you can, what is the best insurance policy to purchase?
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Asked October 3, 2011
There are two basic types of life insurance, whole life and term life. Term life insurance is meant to provide coverage for a specific number of years at which time it will expire or can sometimes be converted to whole life. Term life insurance does not allow you to borrow against the policy, but whole life does.
Whole life insurance is also called permanent life or universal life insurance. All three names refer to a life insurance policy that remains in force for the rest of your life as long as the premiums are kept up to date. Whole life insurance offers several advantages to policy holders, including the ability to borrow against your accrued cash value and the ability to decide how and where your premiums are invested. Whole life insurance is more expensive than term life, but it is also a more powerful financial tool.
Whether or not you can borrow against your life insurance policy should not be the final decision for the type of policy you buy. Term life insurance is better suited for circumstances that will become unnecessary after a few years, such as a term life policy used to make sure that your children will be able to attend college even if you pass away. If your only concern is being able to borrow money against the account, you would be better advised to open a high yield savings account, not to take out a life insurance policy. Whole life insurance builds up a cash value over the course of time, but there is no value to borrow against for the first several years.
Answered October 3, 2011 by Anonymous