Life insurance isn’t just about death benefits. In fact, it can help you build your life by helping you purchase your home. That’s because any life insurance with cash value – such as whole and universal life – can be considered liquid asset. This means you could use it as collateral for a loan, or use the cash values to make a down payment or simply take out a loan against your policy’s cash value.
Life insurance as collateral
Having the right type of life insurance is essential if you wish to use it toward your home purchase. Lenders are more likely to accept whole or universal life. Not only does this type of insurance accumulate cash value over time, it also doesn’t have an expiry; it lasts your entire lifetime as long as you pay your premiums.
Thus, if you default on your loan, the lender can access your insurance’s cash value to use as loan payment. And if you die before you could pay off the mortgage, the lender collects from your death benefit. Any money that’s left goes to your heirs. With these safety nets in place, lenders are more confident in giving you easy credit at affordable rates.
Life insurance as downpayment
You can use the cash value component of your whole or universal life by putting it toward your down payment or future mortgage payments. You can do this by making a withdrawal or partial surrender. This means taking money out of your policy. While your policy remains in force as you continue to pay your premium, a withdrawal would reduce your death benefits by the amount you took out.
You could also opt for a full surrender of your policy to get access to the full value of your policy. However, this means your policy will be gone forever.
Life insurance as source of funds
You can also take out a loan from your whole or universal life policy. Your policy’s cash value serves as collateral for the policy loan. The amount you can borrow varies with each insurance provider. The maximum policy loan can be at least 90% of the overall cash value.
Note, however, that before you can borrow against your life insurance policy, some insurers will require your cash value to reach a certain amount. For some, it can take 5 to 10 years for your cash value to reach a point where you can take out a loan. But if your cash value is tied to the market (universal life), it can grow much faster compared to a policy that grows at a fixed rate (whole life).
While borrowing against your policy does not require an income or credit check, nor are you required to pay back the loan within a specific time frame, you will need to pay interest on the loan, which compounds over time. If you fail to pay back the loan during your lifetime, the total outstanding amount will be deducted from your death benefit.
Choosing the best strategy
With 3 strategies in using your life insurance policy to buy a home, find out which one works best for you. Just ask the experts! Call Mercado Global Insurance Brokers and we’ll point you to the best path to make your dream home a reality.
