Can I use my life insurance policy as a form of forced savings account?
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Asked July 21, 2010
Sure, if it is a whole life insurance policy. Because there is no guaranteed payout from a term life insurance policy, these are not well-suited as a savings tool, but whole life and cash value policies may be a perfect way to force yourself to save money.
In order for a life insurance policy to remain in effect, the premiums must be kept up to date. A portion of each premium is in turn invested into the interest bearing account of the policy. One of the best features of whole life insurance is that the policyholder can make use of the money accrued in the policy just as though it were a savings account. In fact, a whole life policy may even allow some degree of control over where and how the money is invested in stocks, giving it the potential become extremely high yield or lose value in the case of failing investments.
Another type of whole life insurance, a cash value life insurance policy, also makes a tax-deferred tool for savings. The premiums for this type of policy are higher, but the policy has a set maturity term similar to a term life policy, and offers a cash payout at maturity, even if the insured person remains healthy and well. In this sense, the policy could be considered as a savings account with death benefits.
Another aspect of whole life insurance that is reminiscent of other financial activities is the fact that you can borrow against most whole life policies. This allows you to allow interest to accumulate on the one side, or borrow against the accrued value of the policy if a particular hardship leaves you strapped for financing.
Answered July 21, 2010 by Anonymous