Many people struggle to come up with tens of thousands of dollars for a down payment on a house. Permanent life insurance covers a policyholder for life, as long as premiums are paid on time. The more paid in premiums, the more cash value accumulates.
If you have a whole life, variable life or universal life insurance policy with a substantial cash value, you can access money through a loan, partial surrender (withdrawal), or full surrender and use it for a down payment to buy a house. You’ll have to choose how to access funds based on whether you want to repay the money and whether you need to provide death benefits to your beneficiaries.
Loan
Life insurance companies often limit the percentage of a policy’s cash value that can be taken as a loan. If you borrow money from your insurance policy, it’ll still have some cash value and remain in effect.
The loan will have interest, but you can take as much or as little time as you want to pay it back. The amount of your death benefit will be reduced by the value of the loan. If you want to leave money to your loved ones after you are gone, you should repay the loan as quickly as possible to make sure your beneficiaries still receive death benefits.
You won’t have to pay taxes on a loan from an insurance policy if the policy remains in force. If you surrender the policy or can’t afford the premiums and interest, and the amount of the loan is greater than the amount of the premiums you paid, you may be taxed.
Withdrawal
If you take a withdrawal, you’ll partially surrender your life insurance policy. The amount of your death benefit will be reduced by the amount of the withdrawal. The insurance company will probably require you to keep at least a small percentage of cash value in the policy. You may have to pay surrender fees in the early years of the policy. If you withdraw more than you have paid in premiums, you’ll have to pay taxes.
Full Surrender
If you want to withdraw all your life insurance policy’s cash value and you don’t need to leave insurance for your family after your death, you can choose a full surrender. You may have to pay surrender charges, plus taxes if the cash value of the policy is higher than the amount you paid in premiums.
Should You Use Life Insurance to Buy a House?
If you have a permanent life insurance policy, you may be able to use the cash value you’ve built up to achieve your dream of homeownership. Talk to your insurance agent or financial planner to make sure you understand the potential benefits, costs and risks.
This article is intended for informational purposes only and should not be construed as professional or legal advice.
