Permanent life insurance plans accrue money that is set aside into a savings account. The money can then be used as an asset to obtain a loan. These types of loans do not actually have to be paid back, but can be if so desired. In the case that the loan is not repaid, the amount is deducted from the policy, which in turn reduces the death benefits. Obtaining a loan against your life insurance policy is distinctly different than withdrawing funds from an account, and insurance companies may even charge interest on it. Loans obtained against policies can still cause the dividend earned on the account to be affected.
In many cases it is possible to borrow as much as the cash value of your policy. These loans come with interest rates that vary widely and there may be unexpected fees accompanying the borrowing process. Some policies are more ideal for borrowing than others.
In paying back the loan, if your payments are not high enough to cover the owed interest, it will then be attached to the loan and go on accruing at a high rate. Should the cash value of an account go over its amount, the policy will lapse at some point. To avoid this, devise a schedule for paying the loan back, so that you can keep the policy and still have the death benefits go to your beneficiaries. In many cases the amount of the loan’s interest is exceeded by the interest on the residual money that is in the savings account. One can allocate these dividends to the loan interest as an effective way to balance things out.
When choosing a policy, you will need to determine the correct amount of life insurance that is right for you. Although insurance companies offer a spectrum of estimates as to what size policy a person will need, the best thing to do is calculate your own individual requirements and buffer the estimate to take into account any uncertainties that may occur.
First, figure out how much your dependents will need by looking at their cost of living. Keep in mind that they will need to pay your medical and funeral costs, balance outstanding debts, obtain new benefits if offered by your employer, and in general keep up with their standard of living. Know that expenses are ongoing and will increase in magnitude as time goes on, affecting your calculations. It is better to take the time to do a thorough calculation than to overpay or underpay.
After determining the amount, you will then need to decide if you want term or cash value life insurance. Generally, term life insurance is the ideal option for the majority of people. These plans are cheaper and less complicated to choose because across the board insurers offer very similar deals. Simply look for the one with the highest quality and the best price. Conduct research to make sure that your insurer delivers on their claims.