Utilizing life insurance to fund real estate is often one of the most overlooked ways to fund cash flowing properties, yet one of the best. People often stray away from using this technique because they feel it’s too “complicated” or they feel like they don’t have direct access to the cash value within their policy. Let’s break it down to understand how to use this and the advantages it provides.
First off to clarify this is not possible with only term life insurance since that is only for a set number of years and builds no equity within the policy. This strategy can only be utilized with a whole life insurance policy (also called permanent life insurance). When starting one of these policies it’s important to make sure the policy is heavily frontloaded, another way to put that is that the policy is overfunded. The reason this is important is to build up the cash value as fast as possible limiting the amount of time until you can utilize a loan against the cash value to purchase a property.
When looking at illustrations for whole life insurance it’s important to remember that the policy is not just a short-term investment but a long-term investment. The policy will typically take around 3 years before you can start pulling off the cash value. Most people hear that and immediately tune out the rest of the benefits of utilizing this tool but please keep with it to see the value. After securing a properly structured whole life insurance policy that will be accumulating a cash value with a consistent dividend rate it’s time to look at purchasing the real estate property.
Once you’ve found a property that will cash flow and fit your real estate expertise, it is important to utilize a line of credit to access the cash value of the policy. Yes, you can surrender parts of the policy or pull from your basis but doing either of those will greatly hinder the accumulation of your cash value. One other option people will bring up is the insurance company can also provide a policy loan, however the interest rates are higher than what you would be paying with just a line of credit.
In securing a line of credit go to a trusted bank and utilize your whole life insurance policy as collateral. When you have the loan secured you will have access to your line of credit without having affected the accumulation of the cash value within your life insurance policy. Typically, with utilizing a bank for this the interest rate is less than the dividend rate your policy is gaining, allowing you to have a net positive while accessing the cash value of the policy! With the line of credit, it is important to be careful with how you utilize it. Only use it to purchase assets or build assets that will cashflow. The reason being is that you want the asset to cashflow more than the payments on the line of credit, that way it doesn’t come out of your pocket directly. Once you’ve mastered utilizing this technique leverage it to purchase more cash flowing properties!
