Life insurance is a necessary part of your overall financial picture that can give you and your loved ones security. There are several kinds of life insurance, but the two main classifications are term life and whole life. Term life guarantees a death benefit for a set number of years. Many people prefer it because it comes with lower premiums and can be purchased for large amounts. One of the most common questions is if you can borrow against term life insurance.

Term Life Insurance

You cannot borrow against the insurance. The reason that term life policy premiums are so low is that you are not building any cash value. You are basically paying just enough to cover the risk that the insurer is taking in insuring you. If you have a set budget that you can devote to insurance premiums, but need to have a larger benefit amount because you have a young family or have little equity in your home, term life insurance may be the only option that gives you the amount of coverage you need at a premium you can afford. You can purchase term life for as long of a policy period as you need. After that term is up, though, your premium will increase.

Whole Life Insurance

Whole life insurance, on the other hand, provides a death benefit while it accrues cash value. Your premiums are higher, but part of the money goes to pay for your death benefit and the other part goes into a sort of savings account. Since it has cash value, it is considered an asset and can be used to help you get a mortgage or other loan. You can also borrow against it in case of an emergency.

Borrowing Against Insurance Policy

Since part of the money goes toward the death benefit, you cannot borrow the entire amount you have paid in, but you can borrow most if not all of the cash value. The actual percentage you can take out varies from insurer to insurer. There are usually penalties attached, such as interest or fees and you have to pay the money back. The amount of time allowed to repay also varies by insurer, but if the amount borrowed is not repaid before your death, the policy's death benefit gets reduced by the amount of the loan.

Which Policy Is Right for You?

Before deciding on which type of policy is right for you--term or whole life--think about where you are in your life, what your current needs are and what you expect your future needs to be. Once you have done that, sit down with a financial adviser and discuss which policy type will best help you meet your goals. Investigate different company's policies to see which one is the best fit for you.

Source:

Money Instructor: Borrowing Against Life Insurance

Investor Guide: Borrowing Against a Life Insurance Policy