As real estate investors, we're always looking for ways to maximize our profits and reduce taxes. And both can take some creativity at times, especially once you've maxed out some of the more traditional methods of tax deferment like a 401(k) or self-directed IRA account. But if you're looking to finance a real estate investment, there's a less well-known option that allows you to borrow from your life insurance policy.
The infinite banking concept popularized the idea of borrowing from life insurance, and while there are things to take into consideration, it can be a viable way to grow your wealth through real estate, tax deferred, while taking care of your family. Find out whether you can borrow against your policy, understand the terms associated with such a transaction, and determine whether it makes sense for you.
How does borrowing against life insurance work?
Life insurance can give you peace of mind, ensuring your loved ones are taken care of in the event of your death. But no one wants to tie up large sums of money and leave it sitting there without any sort of return, which is why many turn to real estate to grow their money. With a whole life insurance policy -- one with a cash value you can draw against -- investors are able to take a loan against the funds, turning each dollar into $2, $3, or more.
This life insurance policy, also referred to as permanent life insurance, can act like a savings account or home equity line of credit (HELOC). As you pay your premium, you build up funds within your account, which you can then borrow against. Doing so allows you to grow the money at significantly higher interest rates than a bank's savings account and benefit from the added bonus of being tax deferred.
When you draw from a permanent life insurance policy, there are no loan fees or closing delays like those you might encounter with a HELOC, and when the deal is done, the interest paid on the loan is paid to your policy, not a bank.
Permanent life insurance policies have much fewer restrictions than other government-controlled tax-deferred accounts. That means fewer restrictions on what you can purchase and no need to be approved by a life insurance employee who may not know how to invest in real estate.
Real estate, although less liquid than other investment options, is often a good match for life insurance loans because it can comprise longer-term investments that provide a somewhat passive return on investment.