As real estate investors, we are always looking for ways to maximize our profits and reduce taxes. And both can take a bit of creativity at times, especially if you’ve maxed out some of the more traditional methods of tax deferral like a 401 (k) or a self-directed IRA account. However, if you want to finance a real estate investment, there is a lesser known option that can be used to borrow from your life insurance.
The concept of infinite banking popularized the idea of life insurance borrowing, and while there are a few things to consider, it can be a viable way to grow your wealth through tax-deferred real estate while also caring for your family. Find out if you can borrow against your policy, understand the terms and conditions of such a transaction, and determine whether it makes sense to you.
How does life insurance borrowing work?
Life insurance can give you peace of mind and ensure that your loved ones are well looked after in the event of death. But nobody wants to tie up large sums of money and leave them lying around without any return, which is why many rely on real estate to increase their money. With a life insurance policy – one with a cash value that you can call upon – investors can borrow against the funds and convert every dollar into $ 2, 3, or more.
This life insurance policy, also known as permanent life insurance, can act like a savings account or a home equity line of credit (HELOC). As you pay your premium, you are building money in your account that you can then borrow. This way, you can multiply the money at significantly higher interest rates than a bank savings account and have the added benefit of tax deferment.
When you get permanent life insurance, there are no loan fees or completion delays like there is with a HELOC, and when the deal is closed, the interest on the loan is paid to your policy, not to a bank.
Perpetual life insurance policies have far fewer restrictions than other government controlled tax deferred accounts. That means fewer restrictions on purchases and no approval from a life insurance professional who may not know how to invest in real estate.
While real estate is less liquid than other investment options, it often goes well with life insurance loans as it can include longer-term investments that offer a more passive return.
Terms to be aware of
Life insurance loans require you to continue to pay interest just like any other financial institution. On the plus side, however, the prices are usually fixed and there are usually no penalties for early withdrawal. So you need to get a return on investment (ROI) high enough to justify the cost.
If the investment has inconsistent cash flow that may not cover the cost of financing, it may not be the solution for you. If you take out permanent life insurance, you will have to pay your premium every month or every year. If you do not have the funds available, you could lose your policy. A stable or reliable income will make maintaining it a lot easier.
You also need to do your homework so that you understand the implications of breaking your specific policy. Depending on the plan you choose, outstanding loans could affect the benefits of your beneficiaries in the event of death. This means that depending on your age, life circumstances and policy, it may not make sense to withdraw funds from your life insurance for a real estate investment.
Is that a good fit for you?
If you’ve used up your 401 (k) or IRA contributions each year and want to keep growing your savings, this could be a great option for you. In general, a policy allows you to withdraw funds up to 90% of the policy’s value, but each company has its own specific policy. This way you can use your money in two different ways at the same time.
It makes sense to use your investment dollars. However, borrowing from your life insurance policy can come with many additional fees and premiums. Ultimately, taking out loans from your life insurance policy allows you to use funds that have already been allocated to your investment advantage, but it is only helpful to certain people.
Talk to your financial planner about your specific circumstances so that you can decide whether your life insurance loan is the best option for you. Also, speak to your life insurer because not all plans are created equal.
The “unfair advantages” of real estate are much better now
Investing in real estate has always been one of the most effective avenues to financial independence. That’s because it offers incredible returns and even more incredible tax breaks.
These benefits weren’t enough for Uncle Sam, however, as a new tax loophole allows the prudent investors trading today to earn decades of tax-free returns. We have put together a comprehensive tax guide that describes in detail how you can benefit from this unique investment opportunity. Just click here to get your free copy.
The Motley Fool has a disclosure policy. Editorial opinions are ours only and have not been previously reviewed, approved or endorsed by the included advertisers. Millionacres editorial content is separate from The Motley Fool’s editorial content and is created by a different team of analysts.