Real Estate Investing: Should You Raid Your Insurance Cash Value For A Down Payment?

Are you looking for a great down payment source for your next real estate purchase? Are you otherwise qualified for a mortgage loan, but unable to pull together a down payment? Consider tapping the accumulated cash value in your whole life policy. By doing so, you are merely shifting your investment between two investment vehicles.

In today’s relatively easy mortgage market, getting an 85% -95% mortgage advance rate is not that difficult if you have excellent credit. If your credit standing is less than stellar or if you can not muster a down payment, you may need substantial cash at the closing. An excellent place to look for cash is your whole life policies (or perhaps those of a parent).

The advantages of tapping your accumulated cash value are:

* The loan probably will not affect your credit rating since insurance companies rarely report loans to the credit agencies. * Policy loan repayment can be very flexible as long as you pay the interest on the loan. * Unless you borrow the majority of the accumulated cash value, you can even service interest payments for a short while by borrowing more cash against the policy. * Interest on cash value loans is reasonable, usually between 6%-8% per year. * If you can service the interest for several years, you might be able to repay the loan by refinancing your real estate (assuming the real estate appreciates). * In general, because of the financial leverage involved in real estate, the cash borrowed from your insurance policy used to acquire real estate will grow much faster than keeping it in your insurance policy.

There are certainly some drawbacks to borrowing against your policies. Here are a few:

* Whole life policies from stable insurance companies are usually lower risk investments than real estate. Real estate is an illiquid investment that does not always appreciate. In fact, real estate can sometimes drop in value, wiping out your equity position. * The interest on a policy loan is not tax deductible, while the interest on a second mortgage/home equity loan usually is (if you have either of these choices). * If you allow the life insurance policy to lapse or default in making loan payments, it can result in a significant tax liability. Any termination in your policy will trigger such an event. If you have borrowed against the policy, you may not have sufficient cash to pay the taxes. * Loans against a policy reduce the policy’s death benefit. There would be less money available for the policy’s beneficiary.

Notwithstanding the disadvantages of borrowing against cash value to help finance real estate, I think this source represents an excellent opportunity for young would-be homeowners and real estate investors. If you are first time home buyer, this source could be just the one to help you complete your first purchase.

About the Author

George Parker is a Director and Executive Vice President of Leasing Technologies International, Inc. (“LTI”). Headquartered in Wilton, CT, LTI is a leasing firm specializing nationally in equipment financing programs for emerging growth and later-stage, venture capital backed companies. More information about LTI is available at: www.ltileasing.com.

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