Life insurance policy (1 Viewer)

[SixSpeedFury]

So the wife and I are finalizing on a home after much up and down with covid, inflation, etc. We're currently in the inspection phase. If all goes well we'll close on Dec. 1. My friend has mentioned taking a life insurance policy to add on to the 20% down payment that we already have or any remodeling ventures down the road. Is there any adverse risks in basically "borrowing" your own money? Should I even touch my life insurance to use as collateral?

 

[gmunny]

Congrats on the new house!

Not sure I understand the question. Back when my wife was a stay at home mom, I remembered taking out a term life insurance plan about the same size as our mortgage in the event that something happened to me, the house would be covered.

If you already have 20% down payment, I would not worry about adding anything else as that should be enough to not be required for Mortgage Insurance.

Good luck!

 

[DrStrange]

I have to ask why Hero has a significant amount of life insurance? Is the insurance for protecting against risk? Or is the policy some sort of investment plan? Or is the insurance a tax avoidance technique?

If the life insurance is to protect against an on-going risk - typically to protect Hero's family from the lost income due to his/her death - then it is a bad idea to use Hero's existing policies to fund the house.

The risk in borrowing Hero's own money is he/she is often increasing the risks the life insurance is protecting against. i.e. if Hero die, the loan balance comes out of the death benefit. There also can be some unexpected adverse tax effects.

Red alert if Hero's "friend" is making a commission off her/him. Be careful out there -=- DrStrange

PS If this is a plan to buy life insurance to cover some / all of the loan balance in case the major bread winner dies - then the decision becomes tricky. Too complex to rely on random folks on a poker chip forum. This would be a good place to use professional advice.

 

[casinochipper22]

Question leads me to believe you have some type of whole life policy. Do yourself a favor and get term life and get out of whatever you have asap. Term life is way cheaper. all the others are a rip off. Not my opinion, but his, look into Dave Ramsey for financial advise.

 

[Nanook]

Question leads me to believe you have some type of whole life policy. Do yourself a favor and get term life and get out of whatever you have asap. Term life is way cheaper. all the others are a rip off. Not my opinion, but his, look into Dave Ramsey for financial advise.

Based on the OP he certainly has some sort of Whole Life or Variable Life type of policy. If you are buying Life insurance for risk protection, then yes you should be buying term insurance. For most people that is good advise, however if you are buying it for estate planning purposes then it is entirely different.

The death benefit on life insurance is tax free to your heirs so if you have enough money where that comes into play it can make sense. If this is the case, you should seek advise of an expert in this field. I would not rely on a "friends" advise as there may be a serious conflict of interest.

Just sayin

 

[DoubleEagle]

So the wife and I are finalizing on a home after much up and down with covid, inflation, etc. We're currently in the inspection phase. If all goes well we'll close on Dec. 1. My friend has mentioned taking a life insurance policy to add on to the 20% down payment that we already have or any remodeling ventures down the road. Is there any adverse risks in basically "borrowing" your own money? Should I even touch my life insurance to use as collateral?

45 years in the life insurance business. Life insurance does one thing, and it does it well. It solves financial problems that are created when people die.

Life insurance can only be used as "collateral" if it has cash value, and then only up to the cash surrender value of the policy. Term insurance has no cash value. You cannot use the death benefit as collateral.

 

[Budha]

T

Based on the OP he certainly has some sort of Whole Life or Variable Life type of policy. If you are buying Life insurance for risk protection, then yes you should be buying term insurance. For most people that is good advise, however if you are buying it for estate planning purposes then it is entirely different.

The death benefit on life insurance is tax free to your heirs so if you have enough money where that comes into play it can make sense. If this is the case, you should seek advise of an expert in this field. I would not rely on a "friends" advise as there may be a serious conflict of interest.

Just sayin

This^^^

I’ve had several “friends” try and sell me whole life policies as an “investment”.

When I ran the numbers, whole life was always an inferior option compared to market alternatives.

If it’s for cash/tax management- as Nanook said, that’s a different story.

Do your research before signing up for a whole life policy.

 

[Darson]

In today's market where interest rates are going up and house prices are going down, I would consider term life insurance/critical illness to cover your outstanding mortgage incase something happens to the main breadwinner. You don't want your dependents to be stuck in a negative equity situation where the house value is less than the mortgage outstanding. This happened to a lot of people in the early 1990s and took until the early 2000s before they were out.

That is assuming that you don't already have life insurance that would cover your mortgage.

Life insurance policies that have residual value are at best a waste of money and at worst a scam.

 

[DoubleEagle]

I’ve had several “friends” try and sell me whole life policies as an “investment”.

Not sure they are friends.

 

[Budha]

Not sure they are friends.

True - it was more of the write a list of 50 people you know - lol.

 

[SixSpeedFury]

Good suggestions all around in this thread. I recently switched jobs so I will have to look into which policy I have when I get home. In regards to term life policy, I'm assuming that if I borrow from it and want to reinvest the money back in, that will come with interest, correct?

 

[Darson]

You can't borrow against a term life policy.

 

[gmunny]

Good suggestions all around in this thread. I recently switched jobs so I will have to look into which policy I have when I get home. In regards to term life policy, I'm assuming that if I borrow from it and want to reinvest the money back in, that will come with interest, correct?

A term policy is just buying the insurance with 100% of your premium funding the insurance. There is no cash value, hence you can't borrow against it.

The other polices mentioned above such as whole-life, value added, etc. have a cash value and there may be a mechanism to borrow against the cash value. Those policies usually have a a lot higher premiums than term insurance, but what they are doing is splitting that higher premium between cost of insurance and and some sort of "investment" type vehicle (for returns).

The problem with these types of policies may have high maintenance fees and/or returns may not be as good as if you took the difference in invested in a low costing index fund (plus its more liquid- you can sell it if you need it). I am not a financial advisor, but I would avoid those type of policies (and also annuities). Of course there are certain situations that it maybe beneficial, so its worth asking a financial advisor (unbiased - usually pay a flat fee).

Good luck!