Life insurance policies that build cash value typically offer the option to borrow against the accumulated cash value. The two primary types of life insurance that commonly include a cash value component are whole life insurance and universal life insurance. These policies not only provide a death benefit but also accrue a cash value over time, which policyholders can access through loans or withdrawals.

Whole life insurance offers a guaranteed death benefit along with a fixed premium and a guaranteed cash value growth.

When policyholders borrow from their life insurance policy, they are essentially using the cash value as collateral. The loan is not required to be repaid, but any outstanding loan balance, along with interest, will reduce the death benefit paid to beneficiaries upon the policyholder's death. Interest rates on these loans can vary, and it's crucial for policyholders to understand the terms and implications of borrowing against their life insurance.

It's important to note that not all life insurance policies offer the option to borrow, and the availability of loans can depend on the specific terms of the policy. Additionally, borrowing from a life insurance policy should be approached with careful consideration, as it can impact the long-term value of the policy and the benefits paid to beneficiaries. Policyholders should thoroughly review their policy documents, consult with their insurance provider, and, if necessary, seek financial advice before deciding to borrow from their life insurance policy.

While universal life insurance can provide flexibility and potential cash value accumulation, it also comes with certain disadvantages that policyholders should carefully consider. One significant drawback is the complexity of these policies. Universal life insurance combines a death benefit with a cash value component and investment-like features, making it more intricate than simpler life insurance options. Understanding the policy's mechanics, including how premiums, interest rates, and costs affect the cash value, can be challenging.

Another potential disadvantage is the variability of premiums and interest rates. Unlike whole life insurance, where premiums are typically fixed, universal life insurance allows for flexibility in premium payments. However, this flexibility can lead to fluctuations in the policy's cash value and death benefit, making it harder for policyholders to predict the long-term performance of their coverage.

Moreover, the performance of the cash value is tied to the insurer's investment portfolio. If the portfolio underperforms, it can impact the growth potential of the cash value and, consequently, the overall benefits of the policy. Policyholders bear some investment risk, although many policies have safeguards to prevent catastrophic losses.

Policy expenses and fees in universal life insurance can be higher than in other types of life insurance. These charges, including cost of insurance, administrative fees, and other deductions, can erode the cash value and affect the policy's overall returns.

Lastly, if policyholders do not manage their policies carefully and the cash value is insufficient to cover expenses, there is a risk of policy lapse. If a policy lapses, the death benefit is lost, and the policyholder may face tax consequences.

It's essential for individuals considering universal life insurance to thoroughly understand the terms, potential risks, and costs associated with these policies. Consulting with a financial advisor can provide valuable insights tailored to an individual's specific financial situation and goals.