Can You Use Life Insurance to Purchase Real Estate?

One of the topics we’re often asked about is how to invest using life insurance. While there are many options, one that isn’t considered as frequently is real estate, despite its popularity as an investment vehicle. One of the reasons for its appeal to investors is the judicious use of leverage. However, you will almost always need to borrow from a bank in order to finance a portion of your prospective real estate investment. Enter life insurance.

The Ideal Way to Fund a Real Estate Investment

Not only is using life insurance to purchase real estate possible, but it also happens to be our preferred method for sourcing the down payment. Here’s why: virtually all real estate deals require the purchaser to put up some form of a down payment. While there are exceptions, generally speaking, individuals buying real estate will likely have to put 5-20% down, depending on the type of property–whether it’s an investment, vacation, or primary residence.

Using the assumption that some form of down payment is necessary, the next question is where to get that down payment. We work with savvy, sophisticated real estate investors to structure deals. In the overwhelming majority of cases, our analysis indicates that borrowing from a life insurance policy's cash value for the down payment provides an advantage to the buyer.

Why?

In order to understand this idea, it is really important to understand how one accesses cash value. When you use cash–not cash value–as a down payment for a piece of property you give up your cash potential. You lose the compounding interest of that cash. It will take several years or more to re-save that down payment period. Moreover, your capital is now tied up in a physical asset, and it can only be accessed via a line of credit.

Conversely, let's look at our preferred method of acquiring real estate. If you use cash value via a loan, you borrow against, not from, your life insurance cash value. This allows 100% of your cash to remain in the policy, growing tax-free and uninterrupted, indefinitely. Now you have little to no capital tied up in your property. More specifically, now you don't have to re-save your capital back up from zero for your next property or to maintain liquidity. Instead, you’re paying down the loan against the life insurance policy instead–not rebuilding your savings. This allows you to stay on the compound curve indefinitely! In short, it is almost always better to pay down debt than to restart your savings.

Even more interestingly, there are no repayment terms for a life insurance loan. However, if you were to access your down payment via a line of credit, there are rigid repayment terms. You would also be faced with an onerous process to acquire the loan in the first place, and the bank would be in the senior position against the property.

Now you know why we absolutely love using cash value to acquire real estate! It’s important to note that this can only be done if your advisor has a deep understanding of both real estate and how to leverage insurance properly. More important still is the type of life insurance you choose when planning to execute this strategy.

Choosing the Right Policy for Real Estate Investment

In our opinion, using life insurance to buy real estate can and should only be done with dividend-paying whole life insurance. We vehemently disagree with attempting to use an Indexed Universal Life (IUL) policy or a Variable Universal Life (VUL) policy to pursue your real estate strategy. Unfortunately, we see many false and misleading blogs, social media posts, and articles, especially those espousing the benefits of IULs. 

Remember, insurance exists to transfer risk. Once you move away from dividend-paying whole life insurance, towards an IUL, you have transferred the risk back to yourself, not onto the insurance company. Let’s say you’re borrowing against an IUL and the index you’re tracking doesn’t have a positive year. While you may not lose money, you’ll have no additional capital to borrow against AND the interest expense of the policy may exceed its cash value. This will force you to either add capital to the policy just to keep it in force or surrender the policy entirely.

Why would you ever create a system that could collapse?

Lastly, and, most importantly, many people simply do not understand how an IUL is structured. They’re told that if the market is down, they’ll put up a 0% return and participate in some of the upside of the market. While this is true, not only are you taking market risk, but also, the insurance company reserves the right to increase your premium over time. And, IULs are actually one-year rolling term policies with some market features put on top. They’re inherently unstable and not designed for banking, leverage, or forecasting your costs and risks. In fact, they achieve the exact opposite: the costs can and will go up, performance can vary, the policy can lapse, and, most importantly cash value can be deducted to cover premiums because the costs, particularly in the later years when you need the protection the most, will likely go up dramatically.

While IULs have their place in a portfolio, they’re simply the wrong vessel for banking in our opinion. On the other hand, with dividend-paying whole life insurance, your premiums stay level and fixed forever. Your cash value grows forever. Your available capital grows each year, no matter how the markets perform, and, finally, the risk rests with the insurance company, not the individual. For these reasons especially, dividend-paying whole life insurance really is the best–and only–choice when using life insurance to buy real estate.

Leveraging Cash Value

There are three ways to access a life insurance policy. The first is the unfortunate and inevitable passing of the insured person. In this case, the entire death benefit, less any outstanding loans, is paid on a tax-free basis to the beneficiary.

The second way to access the cash portion of a dividend-paying whole life insurance policy is via a withdrawal. This is generally not recommended because withdrawing removes the cash permanently from the policy. This disrupts the uninterrupted compounding nature of dividend-paying whole life insurance. In certain retirement scenarios, withdrawals in the early years may prove to be somewhat more beneficial than taking loans indefinitely. When accessing the cash value to invest in real estate, however, a policy loan is far superior to a policy withdrawal. Unlike policy loans, withdrawals deplete the capital base and subject you to taxation if you withdraw more than the cost basis.

The third way to access cash value is via a loan feature, which is our recommended method. Life insurance loans are typically between 5 and 8%, pre-collateralized by the cash you've paid in, and allow continued growth for the cash value even while you have a loan outstanding. This ensures that you always have more capital each year than the previous year. Loans against a life insurance policy's cash value do not come with a set repayment schedule. They also don’t require a credit check or overly-involved process. By borrowing against, as opposed to withdrawing, you will compound your capital while providing for both a death benefit and estate planning needs, indefinitely.

Recall from earlier: it is almost always better to pay down debt than re-save principal. The biggest problem we face as both professional investors in real estate and consumers of any good or service is that we spend our money then re-save it and spend it again. Borrowing against the cash value of a dividend-paying whole life insurance policy allows indefinite growth of capital without sacrificing control or access to liquidity. This creates the opportunity to acquire real estate or other financial needs or investments, accelerating progress toward your goals.

Advantages of Using Life Insurance for Real Estate

We've covered a significant portion of the advantages of using life insurance, exclusively dividend-paying whole life insurance (not IUL’s) for real estate. While a policy withdrawal may be taxable, the US tax code dictates that a loan isn’t. Imagine if every time you bought a car the loan from either the dealership or the bank showed up on your W2 income! Loans enjoy a tax-favored status. 

At Fusion Strategies, one unique area of our expertise is advanced estate planning capabilities. Adding life insurance into your portfolio, not only for real estate but for cash flow management in general, greatly simplifies your estate planning. This allows you to keep acquiring real estate indefinitely, knowing that your heirs or business partners will receive a large, tax-free, terminal cash flow upon your death. They can then use it to purchase real estate in your name, your business's name, or in your estate in any other fashion. Simplicity!

Disadvantages and Risks

It is prudent to discuss the disadvantages of using life insurance for real estate. While there are not many, it is important to note first that any loans outstanding against the cash value of your policy will be netted against the death benefit. This will diminish the ultimate death benefit that is passed along to heirs or business partners. However, consider the alternative: 

Using cash instead of a policy loan not only depletes your liquidity, but it also provides zero death benefit. 

Cash is taxable, cash value is not! 

Cash is subject to creditors and bankruptcy, cash value is not! 

Once you spend cash it no longer compounds, but once you borrow against cash value it continues to compound.

If you borrow from a bank you must pay at least interest only. We believe the same mindset applies to using dividend-paying whole life insurance for real estate purchases. If you borrow against your cash value, you should make provisions to keep the interest at bay. Technically, you don’t have to pay the interest on a life insurance policy loan; the life insurance company will not require you to do so. However, if the amount of borrowing plus the accrued interest exceeds the cash value, you will be asked to pay the interest or the policy itself will lapse.

Paying interest exists in all forms of borrowing, so why not pay interest back to yourself?

At Fusion Strategies, we have extensive experience and expertise in structuring dividend-paying whole life insurance policies on behalf of professional investors. Our clients include real estate investors, general partners of funds, and high-net-worth individuals seeking the incredible tax-efficient estate planning features associated with life insurance. If you’re interested in unlocking financial possibilities for yourself or your business, we invite you to reach out and learn more here.