Whole life insurance or permanent life insurance offers lifetime protection to its holder. It guarantees the holder’s death benefit without increasing the premium throughout its term. It is one of the few tax advantages products you can use to buy real estate.
So, should you take out whole life insurance as a real estate investor? Let’s find out together.
Whole Life Insurance and Cash Value
Cash value is the most significant incentive to take out whole life insurance as a real estate investor. It offers you simple and easy access to capital—we can liken it to a savings account but integrated into a life insurance policy. The policy earns dividends annually, and this grows the cash-value account. The fact that the cash value in these accounts is vested and their performance is non-correlated to the stock market means they do not go backward.
Whole Life and Savings Account
A popular alternative to whole life insurance cash value is the savings account. However, while savings attract interest on cash saved, they are often low and taxable. In the end, you make almost nothing. On the other hand, the bank leverages these monies by loaning them out and earning higher interest rates. That is how the system is built—it encourages people to invest in government-provided savings options.
Whole life insurance is a much better option if you want to save. For example, your savings attract a higher interest rate, up to 6% on some cash values. The interests from these savings are tax-deferred, while you can access the cash value tax-free. More importantly, you enjoy asset protection in the form of death benefits—an essential tool for estate planning. No bank will offer you these benefits as part of your savings account.
What is in this for you as a real estate investor?
Let’s introduce a brief analogy to explain further how real estate investors can benefit from the cash value of whole life insurance.
We will compare term and whole life insurance policies while assuming your insurance policy is a $500,000 home.
In the case of term insurance, it is similar to renting a $500,000 home throughout your lifetime. You can get the same $500,000 insurance policy at a lower premium price alongside some additional perks. However, you do not gain ownership of the home—it is only a lease that lasts for as long as you are alive.
Whole Life Insurance
On the other hand, whole life insurance is similar to buying a $500,000 home. This is a long-term commitment where you pay a monthly mortgage premium. But you can easily pay this mortgage while building your equity “cash value.” The equity will grow throughout your lifetime, giving you more purchasing power to pursue other investments.
Your life insurance cash value is similar to a Home Equity Line of Credit (HELOC). The major difference between both is that you are not applying for the line of credit or seeking approval. Similarly, the loan has no origination fees, and the interest goes back to your policy instead of the bank.
Work With A Reputable Insurance Company
Ottawa Certified Financial planners often advise real estate investors interested in whole life insurance to work with reputable providers. Not all life insurance companies offer dividends that increase your cash value. Without dividends, taking out money from your account will impact your performance. Conversely, with dividends, you can take money out without affecting your performance, enabling you to use it as a strong source of funding for your real estate investments.
Whole Life Insurance Is Not Right For Everyone
Whole life insurance is not a one-size-fits-all product. It is only suitable for people with stable and predictable cash flow, who can conveniently make the premium payment without defaults. If you are unsure if you fall into this category, consult your Ottawa CFP for professional guidance.