There are a few different ways life insurance can help you purchase a home. You can assign policy cash value as collateral to obtain a loan, or to negotiate a better interest rate on a loan. You can also borrow or withdraw policy cash value and use these funds to make a downpayment, mortgage payments or even purchase the property outright.
With a collateral assignment, you can sign over a portion, or all, of your policy cash value to a lending organization. Providing additional collateral like this may help you get approved for a loan quicker, or with a better interest rate.
You will not be able to borrow or withdraw the amount of cash value held in the policy as collateral until the mortgage, or terms of the assignment, are completed and the lending organization signs off.
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If you were to die while there is a collateral assignment on your policy, a portion of the death benefit would first be paid to the lending institution to pay off the outstanding assignment and the remainder would be paid to your beneficiaries.
Similarly, if you were to cancel a policy with an outstanding collateral assignment, the policy’s surrender value would first go to pay off the collateral assignment, and the remainder would be paid to you.
Permanent life insurance policies build cash value. With well designed whole life insurance, the cash value accumulates over several years to become much more than you will ever pay in premiums. This cash value can be borrowed, or even withdrawn from the policy, whenever the policy owner desires. Although not limited to these uses alone, these funds can be used to purchase a home, make a down payment, and make mortgage payments.
It’s crucial to note: Unlike permanent insurance, term life insurance doesn’t accumulate cash value and cannot be borrowed from, but some lending organizations may require the purchase of a term policy to secure certain loans.
There are three different ways to access the cash value in a life insurance policy.
You can access cash value as a policy loan by borrowing against your policy. When you borrow against your policy, you are actually borrowing from the insurance company, the insurance company uses the cash value inside your policy as collateral to secure the loan. Since your cash value never leaves the policy it will continue to grow.
Policy loans are interest only loans, as long as the interest on the loan is paid there is no need to pay back the loan. There are no requirements for a policy owner to obtain a policy loan, nor are there any restrictions for how the loan can be used.
If you were to die with a policy loan outstanding, the insurance company would simply subtract the outstanding loan amount from your death benefit before paying the remaining benefit to your beneficiaries.
Important to Note: Policy loans are not normally taxable. However, if interest on a policy loan is left unpaid, the insurance company must take additional loans from the policy to pay the interest. If the policy owner continues to neglect the outstanding loan it will continue to grow until to the point the policy lapses. This situation could trigger some unpleasant tax consequences.
Another way to access your cash value is a withdrawal, or partial surrender. Unlike a policy loan, a withdrawal actually surrenders a portion of the policy, permanently removing cash value. Withdrawals cannot be repaid, and taking one will reduce the performance of the policy.
If the amount withdrawn from the policy is more than the cost basis, total premiums paid, the excess will be taxed as income.
You can also cancel or fully surrender the policy. The insurance company will cancel your coverage and send you a check for the available cash value minus any fees. Just like a partial surrender, a full surrender is permanent, and the amount of surrender value greater than the policy cost basis will be taxed as income.
As soon as there is cash value you can take a policy loan. Cash value usually becomes available shortly after you pay your first premium and accumulates slowly in the first few years of the policy. With a well designed policy, cash value will grow to be much greater than the total amount ever paid in premium.
You can borrow up to the entire cash value amount. Some insurance companies charge interest in advance, so with these policies you will be able to borrow up to the total cash value minus the first year’s interest.
Whole life insurance is one of the best tools for wealth accumulation. Policy cash values are guaranteed and continue to grow regardless of market fluctuations And with a well designed policy, cash value will grow to far exceed the total premiums paid. This money can be accessed with an interest only policy loan at any time for any reason, without damaging policy performance. On top of this, if you should die, your loved ones will be taken care of with the death benefit you leave them.
Cash value is usually available not long after you pay your first premium. Cash value growth is slow in the early years, but with a well designed policy, cash value will grow to far exceed the total amount of premiums paid.
Well designed life insurance can be an excellent tool when buying a home. It can be used as collateral to secure a loan, it can be borrowed from to make a downpayment and of course it provides a way your family could pay off the mortgage if something were to happen to you.
Our family has been designing, selling and servicing life insurance policies for years. It would be our pleasure to help you with all your insurance needs. Schedule an appointment or call us: 702-660-7000 we can help you.
Dr. Tomas P. McFie
Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. Tom McFie is the founder of McFie Insurance which helps people keep more of the money they make, so they can have financial peace of mind. His latest book, A Biblical Guide to Personal Finance, can be purchased here.