Does a term life policy build equity?
The more financial products that get offered, the more confusing the market seems to be. One of the most confusing topics regarding term life insurance involve questions about equity, and how term life insurance builds equity. This handy guide should help make everything clear.
What is Equity?
Equity is the term that is used to indicate how much of something that you are financing you have actually paid for. For example, if you use a $100,000 loan to buy a $100,000 house, and have paid back $20,000 of that loan, then you have 20% equity. In the context of life insurance policies this works the same way. If you have a $100,000 policy that you have paid $20,000, then you have 20% equity, and can use that equity to open lines of credit, or in some cases withdraw it as a cash value. At least that would be the case, if not for the fact that….
Term Life Insurance Does Not Build Equity
Term life insurance is not a product that builds equity. Equity accrues in durable, permanent products, like a home or a whole life insurance policy. However, term life insurance has a sort of expiration date on it, and so does not accrue equity. This makes sense, as if you have paid off 10 years of your 20 year policy, no one will want to or be able to use those payoffs to generate value if the 20 year term expires. As a result, there is no equity to be had or accessed in any way. But this doesn’t mean you should give up trying to find the best term life insurance plan.
How That Helps You
Because term life insurance policies are not durable products and instead lapse, the company is taking a more straightforward gamble on you, and that can mean lower rates. Because the product does not accrue equity, companies do not have to worry about or devote resources to that aspect of the product, keeping the costs down. This lets you get the best term insurance prices, compare term life insurance rates, and ensure that you get the best term life insurance plan.
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