Buying a house is one of the most significant purchases people will make. Sometimes, using your life insurance policy to buy a house may help you get a better home loan and cover related expenses.
Understanding life insurance: not all policies are the same
Life insurance and cash value: how to access your money
Life insurance for building cash value: the sooner you start, the better
How to use life insurance to buy a house
A life insurance policy may benefit you when buying a house if it has cash value:
Before delving into how to use life insurance to buy a house, it’s essential to understand the differences in policies and whether they can benefit you when purchasing a home.
- Term life insurance. This is the most popular form of life insurance, mainly because it’s significantly less expensive. However, a term life insurance policy is only good for a specified number of years or “term” before it must be renewed at a higher rate, or it will be canceled. Because term life does not build cash value, it can not be used towards buying a house.
- Permanent life insurance. Whole or universal life is more expensive, but it has some benefits. Permanent life insurance policies usually last your life as long as you pay your premiums. Most permanent life policies also build cash value that can be used later for expenses like buying a home. With each payment you make, a portion of the premium goes toward the cost of the life insurance, and a portion goes into a type of tax-deferred savings or investment account, which grows compounded interest. Once your policy has enough cash value, you can withdraw from or borrow against your policy's cash value for expenses, such as buying a house.
Using your policy's cash value to buy a house
To access the cash value in your policy, you can make a withdrawl or take out a loan for your down payment or other related expenses if there is enough cash value in your policy.
The amount of cash value in your policy will depend on several factors, including the type of policy, the amount, and the time you've had the policy in place.
When accessing your cash value, you can do it as a loan, withdrawal, or a full surrender.
Policies price range starts at as low as $3.65 per month.
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Borrowing from your cash value
You can rebuild your cash value with a loan by repaying the amount you borrowed against the policy. You will be charged interest until the loan is repaid, but the amount is often lower than what you might get from a bank. You can also determine how much you want to pay back each month.
However, if your loan balance (with added interest) exceeds the policy’s cash value, your insurer may cancel your policy. If you die before you repay your loan, the unpaid amount of the loan will be deducted from your death benefit. One advantage of a loan is that although you pay interest, you don’t have to pay income tax on the money you borrow.
Withdrawing from your cash value
You can also choose to withdraw the money from your cash value. This means you are taking money away from the death benefit, which cannot be repaid. If you withdraw less than the amount you've paid in, you will not owe taxes since you've already paid taxes on that money.
Surrendering your policy
Finally, you can cancel or surrender your policy, although that’s generally not a good idea. When you cancel your policy, your insurer will pay your complete cash value minus any fees. You may have to pay taxes if you receive more than you’ve paid into your policy. You also will no longer have life insurance through that policy.
The bottom line
Permanent life insurance can be an investment, not only for your loved ones if something happens to you but also for your future financial needs. Because permanent life insurance policies can build cash value, you can use your life policy's cash to help with large expenses, such as your children's college tuition, retirement, and home ownership.
The key is taking out enough insurance early to build the necessary cash. Also, the earlier you take out a permanent policy, the lower your premiums will be.
A professional life insurance agent can help you determine the right life insurance for your needs, budget, and future goals.
How quickly does life insurance build cash?
A permanent life insurance policy's cash value is determined by a number of factors, such as the type and amount of the policy. In general, it takes between two and five years for a life policy to start building cash value.
How much money can I borrow from my life insurance policy?
The amount of cash you can borrow from your permanent life insurance policy depends on the amount available and your insurance plan. Some insurance companies will only let you borrow up to a set percentage of the policy's cash value. Some also have a set minimum to meet to take out a loan against your policy.
Is it better to withdraw or take a loan against my life policy's cash value?
This depends on your specific needs and goals. When you take out a loan, you will pay interest on the loan amount. However, you do not have to pay taxes on the loan amount, and you can determine how to repay the loan. Once the loan is repaid, your death benefit and cash value growth return to their previous rate. When you withdraw funds from your policy, your death benefit is reduced, and your cash value's growth rate is based on the new policy amount.
Permanent life insurance policies build tax-deferred cash value over time, which may be used toward purchasing a home.
If your life insurance policy has enough accrued cash value, you could pay off the home purchase with a policy loan or cash withdrawl.
In most cases, you will likely only have enough cash value to use for a downpayment and closing costs on a home purchase.
- National Association of Insurance Commissioners. Center for insurance policy and research: life insurance.
- National Association of Insurance Commissioners. Life insurance.
- National Association of Insurance Commissioners. Life insurance buyer's guide.