Can I Use My Life Insurance to Buy a House?

Purchasing a home is a significant financial commitment, and finding the funds can be challenging. One question that often arises is whether life insurance can be used to fund the purchase of a home. In this article, we will explore the possibilities, policies, pros and cons, and risks associated with using life insurance for this purpose.

Can Life Insurance Be Used to Purchase a House?

Depending on the type of life insurance policy you have, yes, it is possible to use life insurance to buy a house. In fact, life insurance funds can be used to settle various debts, such as credit card balances, personal loans, or medical bills.

Life insurance can provide funds in two main ways: through the cash value component of certain types of policies, or by borrowing against the policy.

There are five common types of life insurance: whole, term, universal, variable, and final expense. Term life insurance does not accumulate cash value and so will not accommodate the purchase of a home, and final expense life insurance won’t accrue enough to buy a house. 

Here’s a quick snapshot of the types of life insurance that have the potential to accumulate significant cash value, and what differentiates one from another:

Whole Life Insurance

• Lifetime coverage: Provides coverage for the policyholder’s entire life.
• Fixed premiums: Premiums remain the same throughout the policy’s duration.
• Cash value: Accumulates cash value over time; can be accessed through withdrawals or loans and can be used for various purposes, including purchasing a home.

Universal Life Insurance

• Adjustable coverage: Allows for changes in the death benefit amount.
• Flexible premiums: Policyholders can adjust their premium payments.
• Cash value: Accumulates cash value; policyholders have the flexibility to adjust premiums and coverage amounts. Cash value can be accessed for significant expenses like buying a house.

Variable Life Insurance

• Investment options: Includes investment component with various sub-accounts.
• Flexible coverage: Potential to adjust death benefit and premiums based on policy performance.
• Cash value fluctuations: Accumulates cash value which can be borrowed against or withdrawn, although it comes with higher risks due to market fluctuations.

Using Life Insurance to Buy a House: Pros & Cons

It goes without saying that using life insurance to buy a house is an unconventional financing method! No surprise, then, that this approach can offer unique benefits and come with potential drawbacks. Let’s look at the pros and cons to help you make an informed decision about whether this strategy aligns with your financial goals and circumstances. 

Notice as you review these lists that both include tax implications; be sure to consult with a tax professional to understand the advantages or disadvantages of accessing your life insurance funds. 

Pros 

• Access to Funds
  Provides an additional source of funds that can be used for a down payment or to pay off your mortgage.

• Tax Advantages
  Withdrawals or loans against the policy’s cash value may come with tax benefits, depending on your policy and how you use the funds.

• No Credit Check:
  Accessing funds from your life insurance policy doesn’t require a credit check, so there’s no hard inquiry that could temporarily lower your score.

• Flexible Repayment
  Loans against life insurance policies typically have more flexible repayment terms compared to traditional loans.

Cons

• Tax Implications
  Withdrawals and loans against the policy’s cash value, as well as the associated interest on loans, may come with tax implications, depending on your policy. Additionally, there may be tax implications if you surrender your life insurance policy to access the cash value or if the policy is part of your estate and has significant value.

• Reduced Death Benefit
  Withdrawing from or borrowing against the policy reduces the death benefit available to beneficiaries.

• Potential Policy Lapse
  Excessive borrowing or withdrawals can lead to the policy lapsing if the remaining value cannot cover the premiums.

• Interest on Loans
  Loans against the policy accrue interest, which can grow if not repaid, further reducing the policy’s value.

Steps to Access Cash Value

If you decide to use the cash value of your life insurance policy to buy a house, you can access the funds in three primary ways: making a withdrawal, taking a policy loan, or surrendering the policy.  Be sure to consult with your insurance agent before taking the action steps necessary to pull the trigger on any of these options.  

Step 1. Determine the Cash Value

First, you need to determine the current cash value of your life insurance policy. This can be done by reviewing your policy statements, which regularly detail the accumulated cash value. Additionally, you can contact your insurance agent to get an up-to-date figure and inquire about any associated fees or charges for accessing the cash value.

Step 2: Evaluate Options to Access Cash Value

Once you know the cash value, evaluate if a withdrawal, a loan, or full policy surrender will suit you best. 

• Withdrawals allow you to take funds directly from the cash value. Also known as a partial surrender, this is usually limited to the amount of premiums paid without incurring taxes, but any amount over that may be taxable. A partial surrender allows you to keep your coverage and build it back up again. 

• Policy loans enable you to borrow against the cash value tax-free, with interest accruing on the loan amount. The interest rate is usually lower than that offered with a personal loan. The loan must be repaid to avoid reducing the policy’s death benefit.

• Surrendering the policy entirely to access the full cash value will terminate the policy and may result in taxable gains if the cash value exceeds the premiums paid. Depending on the policy, you may also be subject to a surrender charge.

Step 3: Requesting Access to Funds

To access the cash value, you need to submit the appropriate request to your insurance company. For withdrawals, you will need to complete and submit a withdrawal request form specifying the amount you need. For policy loans, complete a loan application provided by the insurance company, indicating the desired loan amount. If you choose to surrender the policy, submit a policy surrender form. The insurance company will then process your request and disburse the funds, typically within a few business days, after deducting any applicable fees or charges.

Step 4: Using the Funds to Buy a House

Once in receipt, you can use the funds to support your home purchase. The money can serve as a down payment, cover closing costs, or pay for other related expenses. In some cases, you might use the funds to pay off an existing mortgage or to make monthly mortgage payments, thereby reducing your overall financial burden related to the home purchase.

As an aside, can you use life insurance as collateral for a mortgage? 

Yes. This process involves assigning the life insurance policy to the lender, giving them the right to claim the policy’s death benefit if you default on the mortgage. This arrangement provides the lender with additional security, ensuring that the mortgage will be paid off in the event of the policyholder’s death. However, this reduces the death benefit available to your beneficiaries until the mortgage is fully repaid.

Alternatives to Using Life Insurance for Buying a House

There are, of course, other ways to fund the purchase of a home than using life insurance – some traditional, and others just as untraditional as the life insurance option. Each has its own set of benefits and considerations. Carefully consider your options against your financial circumstances and long-term goals, consulting with a financial advisor if you’re unsure about which is best for you and your family.

• Traditional Mortgage – conventional and government-backed loans
• Personal Savings – savings accounts and investments, like stocks, bonds, or mutual funds
• Retirement Accounts –  borrowing from your 401(k), IRA withdrawals
• Home Equity – home equity loan or home equity line of credit (HELOC)
• Liquidating Physical Assets – selling valuable items (cars, jewelry, collectibles)
• Family Gifts or Loans – family assistance or private loans
• Grants & Assistance Programs – first-time homebuyer programs, down payment assistance programs
• Employer Assistance Programs – employee homebuyer programs or benefits
• Online Platforms – crowdfunding platforms dedicated to real estate or personal financial goals

Want to discuss your life insurance options? Connect with the Independent Insurance Associates team today to discuss your future!