A home purchase is a substantial investment that calls for cautious money management. Making a down payment is an important part of buying a home, and for many prospective buyers, it can be stressful to come up with one. There are several methods to save money for a down payment, but you might be wondering if your life insurance policy can assist defray the costs. The good news is that, if you have the correct kind of coverage, you can utilise life insurance as a down payment. Let's find out more about making a down payment with your life insurance policy.

Having the Right Type of Life Insurance

To use your life insurance policy as a down payment, you must have the appropriate kind of policy. A permanent life insurance policy covers you for the entirety of your life and builds cash value over time, in contrast to term life insurance, which only protects you for a predetermined amount of time. The monetary value increases as more premiums are paid. You can borrow money against the cash value just like you would with a credit card or loan after it has accumulated a sufficient balance. However, until the debt is settled, you will need to pay interest every month (or with money from the death benefit).
Some insurance providers also provide universal life insurance, which enables you to make additional premium payments. This increases the cash value and provides additional funds for future borrowing. Term life insurance is the only sort that cannot be used as a down payment because it lacks a cash value that may be used as collateral.

How to Take Money Out of Your Life Insurance Policy for a Down Payment

If you have a permanent life insurance policy building cash value, it is relatively easy to use as a down payment on your home. Money can be borrowed from a life insurance policy in three ways:

Loan – A loan is the best choice if you still want to retain your life insurance coverage. The loan will have interest due, accumulating over time, so it is best to repay the loan as soon as possible if you intend to keep the policy for a long time. However, if you make the required premium and interest payments, there is no term limit, so you are not obligated to pay it back in any particular time frame. You should, however, be aware that some lenders will not allow you to borrow funds for your down payment. Typically you must provide the minimum required funds yourself, but you could borrow to increase your down payment.

Withdrawal or Partial Surrender – When you withdraw or partially surrender your life insurance policy, you reduce your death benefit by the amount of cash withdrawn. If you have a high cash value relative to your death benefit, it could impact your policy significantly. It could also result in surrender fees during the first years of your policy. However, a withdrawal is a good option if you don’t mind a lower death benefit but still want to keep some life insurance coverage.

Full Surrender – If you want to access the total value of your life insurance policy and do not need to keep it enforced, you can surrender your policy in full. Your life insurance policy will be gone when you do this, but you can access the total cash value minus any applicable surrender charges.

Benefits of Borrowing from Your Life Insurance Policy for a Down Payment

A life insurance policy with cash value is a very appealing way to help with down payment costs for homebuyers. Here are a few other benefits of tapping into your life insurance policy to cover a down payment:

Lower Interest Rates and Mortgage Payments – When a down payment covers 20 percent of the purchase price (or more) instead of the minimum 5 percent, you may qualify for a lower interest rate, which means lower monthly payments too. You will also not have to purchase mortgage default insurance. All of this means more money in your pocket.

Coverage for Other Costs – Since a permanent life insurance policy can be borrowed against relatively easily, you can also access it for other expenses like the home inspection, renovations, moving costs, or furniture to make your home move-in ready.

Accessible Liquid Assets – Many policyholders use their cash value as a savings account to be accessed in an emergency. If they fall behind on their mortgage payments, they could borrow against the policy and use the funds to get up to date. This safety net gives mortgage lenders more confidence in a potential borrower, resulting in lower interest rates.

Using Life Insurance for Your Down Payment

For some homeowners, using life insurance as a down payment may be a sensible choice. However, before making a choice, it's crucial to thoroughly weigh the consequences of borrowing from your cash value. Although a down payment can be covered by life insurance, it's crucial to keep in mind that borrowing against your policy can lower its value and have potential tax repercussions. It's also vital to make sure you have sufficient insurance to safeguard your loved ones in the event of an untimely demise. It's crucial to weigh all of your options and come to a decision that is in line with your long-term financial objectives. You can decide if this strategy is appropriate for you with the advice of your financial counsellor and insurance company.