Policy loan

Most life insurance policies allow you to take a loan against the cash value of your policy. You have to pay an interest rate, which is usually 6% to 8% per annum.

The savings in your policy earn a yield of around 2%. You are therefore paying an additional interest of 4% to use your own money. This is a bad deal.

To give a fair deal to its policyholders, the insurance company has to reduce the interest rate on policy loan or give a higher yield on the savings. A fair spread should be 2%. You can find out if the insurance company is treating you fairly by asking about this spread.