FAQ

How Can Life Insurance Help You Buy a House?

Life insurance doesn’t just give you and your family peace of mind in the event of tragedy. can also help you put down roots and buy the house of your dreams.

Do you already have a life insurance policy?

Are you thinking of investing in one?

Here’s what you need to know about borrowing against your life insurance to buy a home.

Disclaimer: The information in this blog was not written by a financial, legal, or insurance professional. Before making any decision about taking out a life insurance loan, get instructions from your insurance broker, financial advisor, or tax advisor.

what kind of life insurance will I need?

The first step is to have the right type of policy. To use your life insurance policy for the purchase of your home, it must be what is called “permanent” life insurance. This essentially means that it covers you for your lifetime, as long as possible and as long as you are current on your premium payments. Permanent life insurance is also sometimes called “whole” life insurance.

permanent life insurance policy

Permanent life insurance is designed to build cash value over time. the more premiums you pay, the higher that value will be. Once you hit a decent balance, you can tap into that value and borrow against it, just like you would a credit card or loan. And just like with these other types of financing, borrowing against your life insurance policy will cost you. will pay interest month-to-month (or from the policy’s death benefit) until the debt is paid.

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universal life insurance policy

Some insurance companies also offer what’s known as “universal” life insurance, which allows you to put additional money toward the policy. that means higher cash value and more cash to draw on later and over time. Variable life insurance policies can also be used to purchase your home. the cash value of these tends to fluctuate with the market.

term life insurance policy

The only type of life insurance you can’t use on your home? that would be “term” life insurance. these policies have no cash value and cannot be borrowed.

life insurance as a liquid asset

There are two ways that having this type of cash value life insurance policy can help you purchase a loan. First, these policies can be considered liquid assets, something mortgage lenders place a high priority on when evaluating borrowers.

Permanent life insurance policies and other liquid assets mean easy and almost instant access to cash. If the borrower fell behind on their mortgage payments, they could easily borrow against that life insurance policy and use the funds to catch up with their lender. Naturally, this type of safety net gives lenders more confidence in a potential borrower, and may even mean offering that borrower lower interest rates as a result.

Bottom line: A permanent life insurance policy equals an easier mortgage application, a higher chance of approval, and perhaps more affordable rates.

life insurance as a down payment

A cash value life insurance policy can also help with down payment and closing costs. Homebuyers with permanent or whole life insurance can borrow against their policy and secure the amount needed for a down payment, closing costs, or any other up-front charges that may be involved in purchasing a home.

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As an added bonus, a higher down payment can mean lower interest rates, a more affordable monthly mortgage payment, and more loan options, all of which have long-term benefits for a homeowner.

Because whole life and permanent insurance policies can be easily borrowed, you can also use them for things like a home inspection, pre-move repairs or renovations, or even things like furniture, decor, or moving costs .

Bottom line: A permanent life insurance policy can help cover your down payment and other initial purchase costs.

possible cons and quick tips before moving forward

Before making important decisions, ask your insurance agent or financial advisor to do what’s called a “current illustration.” this will show you exactly how taking out a life insurance loan will affect your policy. there can be a lot of hidden costs, tax implications, and you can even risk losing your policy if you don’t handle things right.

Borrowing from a permanent life insurance policy can be attractive because you don’t technically have to pay back the loan. Any money you withdraw and don’t return will be deducted from the death benefit your beneficiaries receive.

However, there is still interest on the loan, and that’s where things can get complicated for many people. if you don’t repay the loan, the interest starts accumulating…and then the interest will increase your loan amount and you’ll pay interest on your interest.

It is not necessary to pay the loan, but the interest is. If the amount borrowed plus interest begins to exceed the cash value of your life insurance policy, you risk losing the policy entirely. If you try to pay the interest with dividends or by taking more from your policy, you could end up with a large tax bill from the IRS for borrowing from your policy.

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It goes without saying that borrowing against your life insurance policy to buy a home can be wonderful and life-changing, but it’s definitely not a decision you should make on your own without the help of a financial or financial professional. insurance. there are too many risks and opportunities to get into trouble.

Also, keep in mind that some policies may have restrictions on what the money can be used for, so contact your insurance agent if you’re unsure of the details.

Do you need guidance to buy a house?

Whether you’re looking for help with your down payment, need advice on mortgages or financing products, or just want personalized guidance, the Hugh Home Loans team is here to help.

Contact your local loan officer today and we’ll point you in the right direction.

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