Borrowing Against Life Insurance for Your Down Payment
If your parents bought you a whole life insurance policy when you were a child, you may be unknowingly sitting on a goldmine. Over the years, your policy has been quietly building value, and now that you're thinking about buying a home, you might be wondering if you can tap into that growth to help with your down payment...
We all know that renting a place while trying to save for your first home is incredibly difficult in today’s world of soaring home prices. With a minimum down payment of roughly 15 per cent needed on an average home in Canada, and a national average of just over $800,000 for a single family home (source), you’ll need to save at least $120,000 before you even consider this next big step.
But if your parents bought you a whole life insurance policy when you were a child, you may be unknowingly sitting on a goldmine. Over the years, your policy has been quietly building value, and now that you’re thinking about buying a home, you might be wondering if you can tap into that growth to help with your down payment. The good news is, you can! While you may not have the full amount, you’ll still have a nice chunk of cash available to you. Borrowing against your life insurance for your down payment could offer you a flexible, low-interest option to bridge the gap to homeownership.
First things first
Borrowing against your life insurance for your down payment may sound complicated, but it doesn’t have to be. We recommend following these three steps before you do anything.
Step 1: Confirm you have an insurance policy with a cash value1
Ask your parents if they recall purchasing a permanent life insurance policy for you. Unlike term insurance, this type of insurance never expires so the policy could still be in effect. And it comes with a guaranteed payout (i.e., the death benefit, or the money your designated loved ones or family will receive in the event of your death). This type of policy also includes the cash value we mentioned above. This is money you can access at any time, for any reason – you know, like putting a down payment on a home.
Step 2: Get good advice before you do anything else
If your treasure hunt reveals a permanent life insurance policy with access to a cash value, talk to your advisor to make sure this option is right for you. After evaluating your situation, your advisor will help you answer one question: Will you be better off in the long run by taking cash out of your policy today? If the answer is ”yes,” move on to Step 3.
Step 3: Consider how best to access your life insurance policy’s cash value
You have three choices when it comes to accessing cash from your permanent life insurance, and each one has its pros and cons. Assuming you and your advisor have determined that: (a) you have a permanent life insurance policy, and (b) it has a cash value, you can discuss strategies for accessing that money.
Borrowing against life insurance for your down payment? Here’s how.
As already mentioned, you’ve got three choices – and you need to decide which is best for you… and your family. Keep in mind that the primary purpose of a life insurance policy is to provide financial security to your loved ones in the event of your death. Here are your three options when it comes to borrowing against your life insurance for your down payment:
1. Give yourself a loan2
You can take a loan from the cash portion of your permanent life insurance policy, put that money toward your down payment, and take your time to pay it back. If you choose not to pay it back, the amount you borrowed (plus interest) will be deducted from the guaranteed payout.
2. Give up some of your benefits
You can withdraw a portion of your permanent life insurance policy’s cash value in exchange for reducing the amount of the guaranteed payout to your beneficiaries. This is called a partial surrender3 (i.e., a reduction in the amount of insurance coverage your policy provides). Note that there may be some fees associated with this option.
3. Trade in your policy for cash
You can fully surrender3 (i.e., cancel) your permanent life insurance policy in exchange for taking all of the available money in the cash portion, minus any fees that apply. Just remember that in this scenario, you’ll no longer have your life insurance coverage and will have to requalify for a policy if you want to apply for life insurance at a later time in life.
Things to consider
When borrowing against your life insurance for a down payment, all three options come with consequences you should be aware of before making a decision.
Option 1: If you give yourself a loan, you will eventually need to pay it back – plus interest. The upside is that you can do so on your own timeline (unlike a loan from a bank).
Option 2: If you give up some of your benefits, your loved ones will be impacted by this decision after your death. They will still receive a portion of the guaranteed payout, which includes cash values and dividends, but at a reduced amount.
Option 3: If you trade in your policy for cash, your loved ones will not receive a payout, and could be left to pay off any of your outstanding debt, mortgage, or funeral expenses. Plus, requalifying for a policy later may prove tricky. The older we get, the more expensive life insurance becomes. And we can’t predict whether a future health diagnosis, or a risky job or activity, could make it too expensive – or not possible – to buy life insurance in future.
Life insurance for kids today could help with a down payment tomorrow
The way things are going, it’s hard to imagine our own children ever being able to afford a down payment on a home. So why not give your kids a head start later in life? If your little one is healthy, purchasing a permanent life insurance policy is quick, easy, and inexpensive because of their age. Learn why life insurance is an investment in a child’s future.
Get a free quote
Life insurance is a great way to protect your loved ones in the event of your death — but when it comes to a permanent life insurance policy with a cash value, it can help you while you’re still alive, like making a down payment on your home. Want to learn more? Book a no-obligation call with a Serenia Life advisor to ask questions or get your free quote.
Disclaimers
This blog post contains general information only. Because each person’s situation is unique, it is best to speak with a qualified professional before making any final decisions. Serenia Life Financial does not advise clients on tax, accounting, or legal matters.
1Cash values are accessible via a withdrawal, policy loan, or surrender. These may be subject to taxation and a tax slip may be issued. Accessing the policy’s cash value will reduce the available cash surrender value and death benefit.
2Policy loan is an easy way to access the accumulated cash value of the policy. A variable interest is charged on the amount borrowed. This may result in taxable consequences. Loan can be repaid at any time. Upon death and the loan is unpaid, the outstanding balance including any accumulated interest will be deducted from the total death benefit, with the remainder paid tax free to the beneficiary(ies).
3Policy surrender can either be partial or full surrender of the cash value of the policy. A partial surrender will reduce the value of the policy. A full surrender means cancelling the policy and receiving the cash value less any surrender fees. Beneficiaries won’t receive any death benefit upon full surrender. There may be tax on the amount received that is above the adjusted cost basis.
