How Real Estate Investors Utilize Whole Life Insurance

Whole Life Insurance policies are permanent solutions that offer a wide range of benefits and perks. They are financial tools that help solve needs like:

  • Financial Stability
  • Exponential Financial Growth
  • Wealth Leveraged Creation
  • Leveraged Investment Opportunities
  • Family Legacy
  • Retirement Planning
  • Cash Value Savings 
  • Investment Planning
  • Tax Savings

The cash value account is an investment vehicle within the policy where a portion of premiums are invested and accrues interest over time. The policyholder can access this money while still alive by taking out loans against the policy or cashing out the policy entirely if needed. Before doing anything with the cash value in your life insurance policy, consult your trusted life insurance professional and CPA to learn the consequences of cashing out your policy.

What Is A Whole Life Insurance Policy?

Whole Life Insurance is a type of permanent life insurance that is considered the safest place to put your money due to the guarantees set out in the contracts. These policies have a leveraged death benefit that accrues a cash value that you can utilize for outside investments while your money is still participating in the growth inside of the life insurance policy.   

  • A death benefit that grows with cash value
  • Fixed premiums
  • Statutory protections like divorce, bankruptcy, IRS, and others (these protections change based on your state of residence)
  • Guaranteed growth, stability, and returns for yourself and your family

Advantages Of Whole Life Insurance Policies

The main advantage of Whole Life insurance in your financial planning is SAFETY. Life insurance is a contract that comes with guarantees. The insurance company guarantees certain returns, benefits, and protections as long as the premiums are paid. Those benefits are on a case-by-case basis, and life insurance is about solving each client's specific issues, problems, or desires.  

First, determine the death benefit amount. How much insurance are we buying in year one or over the course of the client's lifetime? This value is the determining factor for how much money is put into the policy. The death benefit also dictates the majority of the cost basis for the plan and controls how much money is distributed when the client dies.

Second, life insurance can be an investment vehicle and financial planning aide.   

  • Leveraged investment opportunities
  • Tax planning
  • Retirement planning
  • Wealth growth 
  • Legacy planning
  • Long-term care
  • Exponential net worth growth
  • No contribution limits
  • Tax-free growth 

There are disadvantages to consider with whole life insurance policies, such as urrender fees and tax implications for early cash-out.

How To Use The Cash Value In Your Policy

You have a few options to use the cash vaule in your policy. Each option has pros and cons outlined below.

  • Withdrawals: completely remove money from your account. There can be tax implications, and fees associated with removing the funds. The money is gone from your account, so you are no longer getting any return on your investment. This also lowers the death benefit.
  • Lump Sum Payments: this usually occurs if you decide to close your life insurance account; fees and tax implications will occur.
  • Policy Loans: This is the most recommended way to use your life insurance funds. Insurance companies offer participating loans, where your money works inside of the policy even though you are utilizing the money outside of your policy. Loans have a cost, annual interest, almost like a line of credit. Loans never have to be repaid (be your own bank works best if you do repay), and policy returns are usually in excess of annual interest so there may not be any out of pocket cost to loans. However, if the interest is paid from outside funds, you increasing premium to the policy without breaking it and allowing for more growth. Interest charged depends on the carrier and loan type, fixed or variable, charged upfront or in arrears. Interest from policy loans are tax deductible. 

Working with a knowledgeable, trusted, licensed, and educated insurance agent is the best way to get the outcome you desire.

Tax Implications Of Whole Life Insurance Policies

Whole life insurance policies have several tax implications to be aware of: 

  • Premiums paid are not tax-deductible.  
  • Policy Growth, and Death Benefit are tax-free 
  • Accelerated benefits like Chronic, Critical, and Terminal Illness or Disability are sometimes taxable
  • If surrendering the policy, the amount received above the premium paid is taxable as ordinary income. 
  • Borrowing against the policy does not trigger a taxable event, as it is considered a loan, not payment. 
  • The outstanding loan amount becomes taxable if the policy lapses or is canceled. 

Real Estate Investors And Whole Life Insurance Policies

One huge advantage of using the cash value component of a whole life insurance policy for real estate investors is that it can act as a source of financing:

  • A policyholder takes out a policy loan against the cash value. 
  • They use the funds to finance a real estate investment property.

This loan can be an attractive option for investors who need help securing financing through traditional channels, such as banks or mortgage lenders. Also, the policy loan is not considered income, so it does not incur taxes.  

Policy loans are collateralized against life insurance. They do not count towards your DTI, so they don’t affect your ability to qualify for loans. In fact, life insurance can help you qualify for more loans as life insurance is in your asset column and makes you more able to pay for your debts.  

Additional Considerations

Comparing the advantages and disadvantages of using the cash value component of a whole life insurance policy versus other investment vehicles is crucial for real estate investors: 

  • Traditional IRAs offer tax benefits, but policyholders cannot borrow against them. 
  • Taxable brokerage accounts also offer potential tax benefits and do not have restrictions on how investors can use the funds. 

These investment vehicles do not offer the guaranteed death benefit that whole life insurance policies provide.

Key Takeaways

A whole life insurance policy may be worth considering if you want to save your money safely, let it grow, utilize it while it grows, and pass it on in ways you would not otherwise be able to. Whole Life insurance provides a safe, guaranteed place for your money to be utilized, grow, and pass on.  

Last Updated: 
May 31, 2023

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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