15 Fascinating Things You Need to Know About Your Insurance

Taking loans from life insurance isn’t free

Life insurance comes in two flavors: term life and permanent life. Term life is straightforward. You pay premiums for a set period of time and should you die during the term, your beneficiaries get a payout. Permanent life, which includes whole life and universal life, includes an investment component and builds cash value over time.

One of the selling points of permanent life insurance policies is that you can borrow against this cash value at any time and for any reason. Even better, the amount doesn’t have to be paid back. It can just be deducted from the amount your beneficiaries receive later.

That may give you the mistaken impression that borrowing against your cash value is a cheap way to get an infusion of money. However, interest is charged on that loan, and interest rates can be anywhere from 5 to 9 percent. The interest goes to the insurance company, so it’s not like you’re paying yourself, either. Plus, depending on how the insurance policy is structured, interest can compound so your loan balance will grow if you’re not making payments. Finally, some companies deduct a loan fee, sometimes called an opportunity cost.