Should you borrow from life insurance to finance your real estate investment?



the person at the keyboard: should you borrow from life insurance to finance your real estate investment?

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Should you borrow life insurance to finance your real estate investment?

As real estate investors, we are always looking for ways to maximize our profits and reduce taxes… Both take some creativity from time to time, especially after you’ve exhausted some of the more traditional tax deferral methods such as 401 (c) or independent IRA Account. But if you are looking to finance your real estate investment, there is a lesser known option that allows you to borrow on a life insurance policy.

The concept of endless banking has popularized the idea of ​​borrowing life insurance, and while there are things to consider, it can be a viable way to multiply your real estate wealth without tax deferral while caring for your family. Find out if you can borrow against your policy, understand the terms and conditions associated with such a transaction, and determine if it makes sense to you.

How does life insurance borrowing work?

Life insurance can give you peace of mind by ensuring that your loved ones are taken care of in the event of your death. But no one wants to tie up large amounts of money and leave it there without any return, so many turn to real estate to multiply their money. With a full life insurance policy – one with a cash value that you can use – investors can take out a secured loan, turning every dollar into $ 2, $ 3, or more.

This life insurance policy, also called permanent life insurance, can act as a savings account or equity line of credit (HELOC). By paying the premium, you accumulate funds in your account, which you can then borrow. This will greatly increase your profits. interest rates than a bank savings account and get the added bonus of tax deferral.

When you borrow money on a permanent life insurance policy, there are no loan fees or closing delays like you might experience with HELOC, and when the deal is closed, the interest paid on the loan is paid to your policy and not to the bank. …

Permanent life insurance policies are far less restrictive than other government controlled deferred tax accounts. This means fewer restrictions on what you can purchase and no need to get approval from a life insurance officer who may not know how to invest in real estate.

Real estate though less liquid compared to other investment options, it is often suitable for life insurance loans as it can involve longer term investments that passive return on investment.

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Conditions to be aware of

Life insurance policy loans still require interest payments just like any other financial institution. On the other hand, rates are usually fixed and there are usually no early withdrawal penalties. So you need to generate a high enough return on your investment (ROI) to justify the cost.

If the investment offers an inconsistent cash flow that may not cover financing cost, it may not suit you. When buying a permanent life insurance policy, you will need to pay an insurance premium every month or year. If you do not have free funds, you may lose your policy. A stable or reliable income will make it much easier to maintain it.

You will also need to do your homework to understand the implications of using your particular policy. Depending on the plan you choose, if you die, unpaid loans may affect your beneficiaries’ benefits. This means that, depending on your age, circumstances, and policy, it might not make sense to withdraw funds from your life insurance for real estate investments.

Does this suit you?

If you run out of your 401 (k) or IRA contributions each year and want to further increase your savings, this might be a great option for you. As a rule, the policy allows you to withdraw funds up to 90% of the cost of the policy, but each company will have its own special rules. This will allow you to use your money in two different ways at the same time.

It makes sense to use your investment dollars. But borrowing on life insurance can incur many additional fees and premiums. Ultimately, borrowing from your life insurance policy allows you to use the funds already allocated to your investment interests, but it will only be beneficial to certain individuals.

Be sure to talk to your financial planner about your specific circumstances so you can decide if borrowing on a life insurance policy is the best choice for you. Talk to your life insurance provider as not all plans are created equal.


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Motley Fool has a disclosure policy. Editors’ opinions are ours alone and have not previously been reviewed, approved or endorsed by included advertisers. Millionacres editorial content is separated from Motley Fool editorial content and is created by a different team of analysts.

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