A dual-purpose insurance product, whole life insurance offers death benefits as well as cash value from which the policyholder can draw. The policy typically pays out a fixed amount on the event of the policyholder's death; however, the cash value stems from the amount that the holder has paid in premiums. Premiums go into either a savings account or an investment account, where ideally these funds generate returns.
One unique feature of the whole life policy is that purchasers can choose whether their premiums go toward gradually accrued savings interest or investments of varying risk levels. Options range from the universal policy, which typically channels premiums into a money market account, to the variable or variable universal policies, which link premiums to stocks or bonds. Changing market conditions mean that variable policies cannot guarantee returns, yet they do carry the possibility of higher returns.
Policyholders can borrow against whole life insurance regardless of plan type, and there is typically no cost to do so. However, the borrower must repay the amount with interest charged by the financial institution that sells the policy. Many institutions allow the borrowed funds to continue generating interest, as though those funds were still in the account. However, account holders should check with their financial institutions to verify individual company policies.