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How to Use Life Insurance for Real Estate Investing

Having a solid personal finance strategy means paying attention to many different areas simultaneously.

It’s important to make consistent income. It’s important to keep your expenses under control.

It’s important to accumulate wealth through investing. And it’s important to protect your assets with risk management, insurance, and other strategies.

Interestingly, many of these strategies offer critical points of intersection.

By harnessing multiple areas of your personal finance strategy in coordination with each other, you can multiply your total effectiveness.

One impressive example of this is using whole life insurance with real estate investing, ultimately multiplying your investment power in the process.

How exactly does this relationship work? And how can you take advantage of it?

The Basic Idea: Life Insurance and Real Estate Investing

Let’s start with the basic idea, then delve into the key concepts required to help you get the most out of this investment strategy.

When you purchase a whole life insurance policy, you’ll pay consistent premiums over the course of your life.

Gradually, the cash value of your policy will appreciate; you’ll keep adding more money with your premiums and you’ll keep generating interest in most cases as well. In this way, whole life insurance functions almost like a savings account or investment account.

As that cash value increases, you may be able to withdraw it directly while you’re still alive. You may also be able to borrow against that cash value, multiplying your financial leverage by allowing you to take out more loans.

There are several advantages to this type of play:

Life insurance and real estate

  •       Double dipping. Purchasing whole life insurance and using it to invest in real estate is a way of double dipping, or in other words, using the same money in two different areas simultaneously. By putting your money into a life insurance policy, you can protect your beneficiaries and accumulate life insurance cash value. At the same time, that money can serve as a foundation that allows you to borrow more money to invest in real estate. Each dollar goes much further when you make a play like this.
  •       Tax deferral. Most life insurance policies are tax deferred, making them function like tax advantaged investment accounts in some regards. Your exact tax benefits are going to depend on a number of factors, including the type of policy you buy, the terms and conditions of that policy, and more. But suffice it to say, many real estate investors end up in a much more favorable tax position as a result of using this type of policy.
  •       Loans and investing power. Borrowing against your whole life insurance policy means getting access to more investing power. Ordinarily, you would be limited by your existing assets and income, as well as your liabilities. But if the cash value of your whole life insurance policy increases enough, it can serve as a pathway to even more borrowing potential. Because much of the power of real estate investing lies in financial leverage, this is a potentially huge advantage.
  •       Available withdrawals. On top of that, many life insurance policies allow you to make withdrawals prior to your death or the collection of traditional benefits. If you end up in a difficult financial position, you can always tap into your whole life insurance policy to withdraw some extra money. Just keep in mind that depending on the conditions, this may be associated with a small tax penalty.
  •       Beneficiary protection. At the same time, investing in whole life insurance is a way of protecting your beneficiaries. In the event of your death, and sometimes your incapacitation, your beneficiaries will have access to significant payouts.

How Life Insurance Works

There are many types of life insurance, but many of them serve similar purposes. Conventionally, throughout the term of your life insurance, you’ll make payments known as premiums to keep the policy going. When certain conditions are met, the beneficiaries tied to that policy can reap the specific benefits.

In this description, we are using intentionally vague, potentially frustrating language because there are so many types of life insurance policies available and the terms vary wildly between them.

Whole life insurance is one of the most important types of life insurance, and it’s going to be the primary focus of this guide. Whole life insurance is a type of permanent life insurance designed to provide you with coverage for your entire life.

In some ways, it pays to think about whole life insurance as a kind of investment plan or special savings account. You’ll pay consistent annual premiums throughout your entire life and capitalize on tax-deferred growth. In some cases, you may even qualify for dividends to be paid into your policy. The premiums of a whole life insurance policy are generally higher than those of a term life insurance policy, but the benefits are also greater.

As you continue to make payments, the cash value of your life insurance policy will increase. This is capital that you can tap into, sometimes without penalty, and gives you a financial foundation you can use to borrow more money.

Overfunding Life Insurance

Overfunding a life insurance policy means intentionally paying more than your standard premiums, typically in an effort to increase the cash value of your policy faster or by a higher amount. This is a strategy that allows you to take advantage of your whole life insurance policy to an even greater degree, multiplying your equity and potential borrowing power.

However, there are a few drawbacks associated with overfunding life insurance that you need to be aware of.

  •   Potential tax implications. Depending on the nature of your life insurance policy and how and when you make withdrawals, there may be potential tax implications in play. For example, you may owe a 10 percent penalty tax on premature withdrawals.
  •   Transition to Modified Endowment Contract (MEC). If your contributions rise above a certain level, the IRS may recategorize your life insurance policy as a Modified Endowment Contract (MEC). Having your life insurance policy categorized this way isn’t the end of the world; this type of policy still provides a death benefit for beneficiaries as well as ongoing cash value life insurance accumulation. However, policy distributions may be subject to harsher taxes. Note that if your policy is transitioned to an MEC, this transition is permanent. 
  •   Risk of lapsing. In rare cases, excessively over funding a whole life insurance policy can lead to your policy lapsing. Be sure to fully understand and comply with all the terms and conditions associated with your whole life insurance policy.

Snowballing Your Real Estate Portfolio

The more you invest in real estate, the easier your future investments will become. Each new addition to your portfolio will ostensibly serve two major financial purposes. First, it will represent new equity, increasing your total net worth. Second, it will represent positive cash flow, adding to your total net income.

As your net worth and net income increase, so too will your capital and borrowing power, multiplying your investing power in two different ways. Once you secure a strong enough foundation in real estate investing, it’s going to become easier and easier to fund and acquire new additions to your portfolio.

Key Strategies for Using Life Insurance and Real Estate Investing Together

This article makes it sound simple, but there are some important nuances you need to be able to recognize if you want to make the most of life insurance and real estate investments together.

  •       Make sure you will benefit from both life insurance and real estate investing. If you weren’t already thinking about a whole life insurance policy, it may not be the right financial move for supporting your real estate investing. Much of the power of this strategy comes from your ability to utilize your money in two different areas simultaneously. Accordingly, the people most likely to benefit from this strategy are ones who will benefit from both life insurance and real estate investing.
  •       Understand the details of your policy. Remember, life insurance policies, including whole life insurance policies, come in many shapes and sizes. It’s important that you fully understand all the details of your policy, so you can follow the rules appropriately and fully utilize whatever advantages are available to you.
  •       Overfund intelligently. Overfunding can be very beneficial to real estate investors. It’s an easy way to multiply the total cash value of your account, increasing your borrowing power and purchasing power. However, because there are critical and irreversible drawbacks, it’s important that you pursue a cash value life insurance strategy wisely. When in doubt, err on the side of risk averse decisions.
  •       Consult with a tax professional. The tax code is very complex (arguably on purpose). Even if you think you fully understand the tax benefits and consequences of whole life insurance and the interactions of life insurance and real estate investing, it’s a good idea to consult with a tax professional and make sure your intuitions are correct. Taxes can be very expensive and impactful, so you shouldn’t neglect them.
  •       Practice due diligence with property investing. Funding your real estate investing decisions with a whole life insurance policy isn’t going to help you very much if you purchase questionable properties. Accordingly, it’s important to practice thorough due diligence with each new property you add to your portfolio. Consider working with real estate agents, property managers, and other professionals in the industry to ensure you continue making great decisions for your financial future.
  •       Avoid overleveraging. Real estate investors start drooling when they think about the potential of increasing their borrowing power. There’s a good reason for this, as financial leverage is a massive advantage. However, overleveraging can be devastating, even to portfolios that are relatively well balanced. Take ample precautions to avoid overleveraging yourself.
  •       Manage your risk. Similarly, it’s important to identify potential risks in this strategy and properly account for those risks. In the realm of real estate, you can practice risk management by appropriately balancing your portfolio; securing different types of properties in different areas and acquiring additional units can insulate you from market volatility. Reducing risk on the life insurance side of the equation typically means scouting for policies diligently and avoiding excessive tax burdens and risks of recategorization. There are also risks that emerge when using these strategies together – most of which we’ve already discussed above.

Making the most of a life insurance policy and making the most of a real estate investment strategy are both big, complicated tasks. Trying to make them work together is an even bigger challenge, despite their natural synergies.

That’s why the investment advisors at Invest.net have taken it upon themselves to learn the nuances of these strategies – so we can help real estate investors like you turn even a trivial amount of startup capital into a nest egg that can sustain them indefinitely.

If you’re a real estate investor ready to take the first step to find the best life insurance company or invest in real estate, contact us for a free consultation today!

Derek Bryan
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