Life insurance is offered in two basic types: temporary and general life. Which one you should select depends on your family situation, age and savings goals. Some, but not all, life insurance policies will save and invest money, and some have a cash value. It is important to understand how the cash rescue works before signing any life insurance form.
If you do not need a savings vehicle, but still want to buy life insurance, you should consider a term policy. This is simply a policy that pays your beneficiaries if you die. You pay for the policy in instalments, whether monthly, quarterly, semi-annually or annually. If you stop paying the premiums, the policy falls. There is no value in the policy if it falls, and you do not receive any money delivering it.
A whole life policy is life insurance combined with a savings or investment account. Premiums, which are higher than for term life insurance, pay for the insurance and also represent a regular contribution to a separate account, which gradually rises in value as you continue to pay the premiums. The investments in the account can go to investment funds, money market funds or other investment instruments that are under professional management.
While paying the premiums, the entire life policy gradually builds cash value as the investment account increases. If you borrow against this value, the insurance company does not restrict the way you use or return the money. The loan can earn interest that you must pay, or the insurance company can contribute the same amount of money to the account, while the loan is exceptional to earn interest again. The amount you borrowed is simply subtracted from the cash value until you pay it.
The cash value also represents the “salvage value” of the policy. This is the amount of money you will receive if you deliver the policy, an option that is open for all the time you are paying premiums. If you decide to waive the policy, the insurance company deducts rescue charges, as well as any outstanding loans and interest applied to the loans. You lose life insurance coverage and also waive the investment account.