The equity in a house is the amount of money the owner would receive upon the sale of the house after any existing mortgages are repaid. Equity in a house builds up over time, depending on the mortgage payments made and other market factors. As a result, the cash value buildup of a limited-payment whole life policy is much greater than straight life policies. Owners of homes can take equity loans on these homes once their equity has reached a significant level. Similarly, owners of life insurance policies can take out loans once the cash value buildup has reached a significant level.
Interest is necessary to compensate the insurer for earlier, unanticipated access to cash.
We shall discuss this in greater detail later in the textbook . Similarly, if the insured dies while a policy loan is in effect, the policy loan is deducted from the face amount of the policy before the beneficiary receives settlement. In fact, cash values in straight whole life contracts build at the slowest rate of any personal life contracts . Finally, it is important to remember not to confuse ordinary whole life policies with the general type of life insurance policies of the same name. Ordinary life insurance encompasses whole life insurance as well as term insurances, endowments, and annuities.