Gabriel Lalonde
August 24th, 2022

All You Need to Know About Whole Life Insurance for Real Estate Investors

Whole life insurance, also known as permanent life insurance, provides lifelong protection to its policyholder. This type of insurance guarantees the death benefit without increasing the premium over time and offers several tax advantages. In fact, it is one of the few financial products that can be utilized to purchase real estate, allowing policyholders to leverage their investment and create additional wealth.

In the case of real estate investors, whole life policies can help them enjoy the peace of mind that comes with knowing their loved ones have financial protection while also having the potential to grow their assets and plan for a secure future.

Everything You Want to Know About Whole Life Insurance for Real Estate Investors

But should you take out whole life insurance as a real estate investor? Let’s explore some of your considerations together.

Whole Life Insurance and Cash Value

Cash value is a compelling and valuable incentive for real estate investors considering whole life insurance. It provides immediate access to capital and can be likened to a flexible savings account seamlessly integrated into a life insurance policy.

The cash-value account grows annually through earned dividends, offering potential for significant growth over time. Moreover, the vested nature of the funds and their non-correlation with the stock market ensure they do not experience any backward movement, providing investors with added peace of mind and stability.

With this unique combination of benefits, whole life insurance with cash value becomes an attractive option for investors seeking long-term financial security and growth opportunities.

Here’s another article you don’t want to miss next: All You Need to Know About Collateral Assignment of Life Insurance.

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. In this case, 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 through death benefits—an essential tool for estate planning. No bank will offer you these benefits as part of your savings account.

We also talk more about planning correctly according to your priorities with permanent life insurance here.

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’ll compare term and whole life insurance policies while assuming your insurance policy is a $500,000 home.

Term Insurance

In the case of term insurance, it’s 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 vital 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.

Do you have critical life insurance? If not, it might be time to consider it. Find out why in this article.

Frequently Asked Questions

Still have questions about whole life insurance for real estate investors? We’ve compiled some of the most common questions we get from our clients to help you understand this financial tool better.

Is whole life insurance a good investment option?

When it comes to investments, there is no one-size-fits-all approach. Whether or not whole life insurance is a good investment option for you depends on your financial goals and risk tolerance. Generally speaking, whole life insurance can be an excellent long-term investment with tax advantages and potential growth through dividends but as expressed above, it certainly isn’t right for everyone.

We’d love to chat more about your specific financial situation and help you determine if whole life insurance is a good fit for you.

What is the average ROI in whole life insurance?

The average return on investment (ROI) for whole life insurance can vary depending on the specific policy and insurance company. Some sources estimate that the ROI for whole life insurance ranges from 1 to 3.5%, which may not seem like a high return compared to other investments.

However, it’s important to note that whole life insurance offers other benefits.

Notably, these include:

  • Tax advantages
  • Guaranteed death benefit protection
  • Potential dividends

Are there any tax advantages for whole life insurance?

As mentioned above, there are potential tax advantages for whole life insurance. The cash value in a policy grows on a tax-deferred basis. This means you won’t owe taxes on the growth until you withdraw it. Additionally, suppose you take out a loan against your policy. In that case, it is usually not considered taxable income as long as the loan doesn’t exceed the total premiums you’ve paid into the policy.

Is whole life insurance a good option for estate planning?

In some cases and for some people, yes. Whole life insurance can be an integral tool for estate planning. The death benefit from a policy can provide a tax-free inheritance for your beneficiaries, which can be helpful if you have a large estate and want to minimize the taxes your loved ones may owe.

Whole life insurance policies can also offer features like cash value accumulation and flexible premium payments, making it a versatile asset for estate planning purposes.

How to make money with whole life insurance?

One way to potentially make money with whole life insurance is through dividends. Some whole life insurance policies offer dividend payments, a portion of the company’s profits distributed to policyholders. Policy holders can reinvest these dividends into the policy to increase the cash value and death benefit or taken as cash.

Another way to make money with whole life insurance is by borrowing against the policy’s cash value. With most policies, you can take out a loan and use the cash value as collateral. This can be a useful source of funds for unexpected expenses or investments.

Carefully consider any interest and fees associated with taking out a loan and the potential impact on your policy’s cash value and death benefit.

Conclusion: Whole Life Insurance for Real Estate Investors

There you have it! Now you know more about how whole life insurance can be a valuable tool for real estate investors and whether it might be right for you.

Are you ready to talk more about this and other financial strategies to help you achieve long-term growth and stability? Contact MDL Financial today for unbiased advice and tailored financial advisory services. Our team has been successfully managing personal wealth since 1990, and we are dedicated to helping you reach your financial goals with bespoke insurance plans and other services.

Let us help you navigate the complexities of real estate investing and make the most of your resources. Schedule a consultation with us and start building your financial future with confidence.

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