Can You Borrow Money From a Term Life Insurancce Policy?
Life insurance protects your family by providing a death benefit that pays for your financial obligations after you die. This death benefit is given to you in exchange for the payment of premiums. At your death, the policy pays the benefit to a beneficiary that you name. Some types of life insurance also provide a cash value savings account. If you buy term life insurance, you don't receive a cash value savings with your policy.
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Function
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Term life insurance provides basic death benefit protection. The insurance company accepts premiums from you in exchange for a death benefit. The policy provides a large amount of death benefit in proportion to the premiums being paid. This is because there is no cash value investment or other miscellaneous charges associated with the policy.
Types
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There are two types of term life insurance. Annual renewable term life is life insurance in which premiums are guaranteed to increase every year. The death benefit remains level. The premiums directly support the pure cost of insurance and nothing more. The premiums increase because, as you get older, the cost to provide the death benefit increases. Level term life insurance is the other type of life insurance you may purchase. Level term life insurance inflates the premium over the pure cost of insurance in the early years of the policy. The excess premium amount is invested to hold down the future cost of insurance. This means that in the early years of the policy, you are overpaying for your insurance. In the later years of the policy, you are underpaying for your term policy. The excess premiums from the early years, plus the interest that excess premium earned from investments, is able to keep your premiums level for the entire term of your policy.
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Benefits
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The benefit of term life insurance is that it represents a low-cost way to purchase life insurance. Since there's no cash value, there's no extra premium required on your part to support the investment function of the policy.
Disadvantages
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The disadvantage to term life insurance is that, since there's no cash value, there's nothing to borrow. If you want to have a cash value savings, you need to pay higher premiums and purchase a different kind of policy.
Considerations
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Consider purchasing a cash value policy so that you have a cash value savings that you may borrow against. Alternatively, you may consider a term life policy with a return of premium feature. Term with return of premium functions by allowing you to get a refund of your premiums at the end of the policy's term. While you cannot borrow against the value of the policy, it does allow you to recoup everything you've paid into the policy at the end of the term.
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