Borrowing against a policy can give you options—what’s the best one?
Life insurance can do a lot of things—it can help give you and your loved ones peace of mind. It can protect and provide even after you’re gone. There are even policies that can accrue value over time. That’s a multi-faceted power player right there.
But did you know that you can borrow money from life insurance to buy a house? Yeah, you totally can! There are ways it can be done. But is it the best option? Mm, depends on how you want to play things. There’s a lot of risk involved. That’s why we’re offering this breakdown of how to use life insurance to buy a house, uncertainties and all. Maybe you’ll find the answer you’re looking for.
- What kind of life insurance policy do you need?
- How to use life insurance to buy a house
- Things to keep in mind
- Next steps
What kind of policy do you need?
To start, there are multiple types of life insurance out there. And not all of them give you the option to borrow money to buy a house. For that, you’ll need a permanent life insurance policy type. Why? Well, because permanent life insurance options often come with something called cash value, which grows tax-deferred over time.
Term life policies, on the other hand, don’t come with cash values. That’s not a flaw. Term life insurance serves a specific function, often at rates cheaper than permanent policies. And it’s the most popular policy type by far. However, to answer the question, “can I use my life insurance to buy a house?” we’ll be talking most about permanent policy types.
How to use life insurance to buy a house
There are a couple of ways you can borrow money from life insurance to buy a house.
One way is to use the life insurance policy, or rather its cash value, as a liquid asset. Liquidity refers to the ease by which one can convert this value into, well, actual money. Using the cash value as a liquid asset would make obtaining a loan easier, since the borrower could (theoretically) borrow against the policy to keep up with mortgage payments.
Another way is to just borrow the money directly. You can borrow against your policy’s cash value, a lot like any other loan. Then you can use that money to put a down payment on a mortgage. Depending on the size of that cash- value, you can probably put down some or even the full amount needed. Plus, a higher down payment might mean lower monthly costs.
Things to keep in mind
So the process seems super simple, right? What’s the catch? Well, there are a couple of things (aren’t there always?).
For one, a policy’s cash value grows over time. It doesn’t just spring out of the snow like a bunch of daisies. In fact, it can take a good, long while before that cash value has enough in it to buy a home. It could even take decades for some policies. So if you’re thinking of quickly grabbing a whole life insurance policy just in time to buy a home, you may be in for a shock.
Also, this isn’t just free money. You’ll be borrowing from the policy itself (i.e., your own money). The larger the loan, the more impact it’ll have on your overall policy. Like, borrowing that money affects your policy’s overall cash value. A weak cash value can even threaten the stability of your policy. So while using life insurance to buy a home is possible and may even be a great idea, it may not always be the right idea for now.
If you don’t have the option to use life insurance for house mortgage purposes, that’s not the end-all-be-all. Home buying can be frustrating. Which is why we also wrote a nice walkthrough of the home purchasing process, from budgeting all the way to closing and beyond. Looking for your next forever home can be a challenge. But you can overcome that challenge with the right tools and the right knowledge. So happy hunting.