Can my life insurance accrue interest?
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Asked August 8, 2014
Life insurance is one of the few types of insurance that has a potential to gain value over time. Not all types of life insurance gain interest, though, and the amount you are able to gain is going to be limited by the terms of the contract. Read your policy carefully and consult your insurance agent to find out exactly how your policy works.
Term life insurance does not gain interest, but it is also one of the least expensive forms of life insurance. With term life, you are buying a specific amount of life insurance for a predetermined number of years. Term life coverage does not include any sort of financial tools such as earned interest, accumulated cash value, or the ability to participate in how the premiums are being invested.
Permanent life insurance usually earns interest, with the exception of final expense insurance. Also known as funeral insurance, this type of coverage is designed with the express intent of paying for your final expenses such as the funeral and your eventual interment. Final expense insurance is priced lower than other types of permanent life insurance because it does not provide you with anything beyond the coverage for your final expenses.
Whole and universal life insurance, and the variations of them, almost always provides financial tools and benefits such as gaining interest over time. The way it works is that a portion of your premiums is put into an accumulated cash value account separate from the face value of the policy. As this amount increases over time, it also earns interest on the accumulated value. You can borrow against the cash value of a policy without reducing the face value that the policy was originally purchased for.
Policies that allow you to participate in how they are invested have a greater potential for earning interest, but they also have the potential of losing cash value. They do this by allowing you to choose markets or stocks to invest in through the policy, and the performance of your picks will affect whether the cash value grows, remains stable, or fades away completely. This is usually the most expensive type of life insurance, and includes fees or other administrative costs. The face value of the policy will never be reduced, but the cash value has the potential of disappearing completely during times of poor economic performance.
Answered August 8, 2014 by Anonymous