Can Life Insurance Be A Source Of Down Payment Funds?

Can Life Insurance Be A Source Of Down payment Funds?  I grew up in a time much different than today.  A time where families planned and took steps to cover possible major financial expenses.  Expenses like funeral costs of a family members.  It was a time where it was very common for parents to not only have Whole Life, Life Insurance Policies for themselves, but on their children as well.  In fact one of my first jobs when I was discharged from the Navy was selling Life Insurance for 3 1/2 years for John Hancock Life Insurance Company.  These days purchasing Life Insurance for your children does not seem to be something younger parents do, at least not most of the younger parents I know.  When I mention Life Insurance they look at me like I am from out of space, and talking about something unspeakable about their children.  The few young parents I know who have taken out a Life Insurance Policy for their child have purchased Term Life Insurance, and not Whole Life, because that seems to be the advise given these days.

For those who are not familiar with the terms Whole Life, and Term Life Insurance:

• Whole Life Insurance - is normally for a specific fixed number of years, upon which the policy is paid-up and worth the full Face Value of the policy, as well as accumulate dividend during that time if the policy is a participating policy.  Before the policy is paid-up it accumulates a percentage of Cash Value and Dividend every year. However, should the policy holder pass away before the policy is paid-up, the beneficiary receives the full Face Value of the policy.
  

• Term Life Insurance - in its most basic form does not have any Cash Value.  Once the term of the policy is reached, the policy stops to have a death Benefit. The policy only has value if the policy holder passes away during the term of the policy.  Kind of like car insurance, it only pays in the case of a car accident and if the policy is still enforce.  The reason why someone would choose a Term Life Insurance Policy over a Whole Life Policy, is because Term Life Insurance is much cheaper than Whole Life.

There are also Life Insurance Policies which are a variation or combination, of both Whole Life and Term Life Insurance. Such as a Variable Life Policy which is part Term Insurance, and part Whole Life, and the policy may also have Cash Value.  For the purpose of this blog and to keep it simple, this blog applies to all Life Insurance Policies that have a Cash Value.

OK so why am I bring up all this?  This is a Real Estate Site not a Life Insurance Site, and this topic at best is very depressing.  The reason for bring up the topic is, because the life insurance policies with cash value (Whole Life Insurance Policies for example), the Cash Value is an acceptable source of downpayment funds just like a 401K Retirement Plan.

A Life Insurance Policy which has Cash Value, is in a since both a Life Insurance Policy and a savings plan.  Therefore, the Cash Value in the policy can be withdrawn by either terminating the policy and receiving the available Cash Value plus dividend, or taking a loan against the available Cash Value in the policy just like you would with a 401K.  The big difference between the Cash Value of a Life Insurance Policy and a 401K, is there is no penalties for terminating a Life Insurance Policy like there is with terminating a 401K.  However, both a Life Insurance Policy and 401K both work the same if the money is withdrawn in the form of a loan.  In both cases should the Borrower pass away before the funds are paid back the funds will simply be reduce from the proceed of the Life Insurance Policy, or balance in the 401K fund.  Also interest is paid on the withdrawn funds until the funds are paid back.   Because the Cash Value of a Life Insurance Policy is like liquid cash it can be used for:

• Down Payment
• Closing Costs
• Reserves

 

A Life Insurance Policy just like a 401K, the Borrower is paying themselves back, so since the money is their own money, the amount of the loan does not count against their Debt-To-Income (DTI) Ratios in qualifying for a Mortgage.  The only thing the Lender will require is documentation of the funds which is easy to do.  The Borrower only needs to provide either a copy of the check from the Insurance Company, or a payout statement from the Insurance Company.

Many young Borrowers whose parents were from my generation have Whole Life Insurance Policies on their children which were obtained for them when they were very young, and they may not know it.  Young Borrowers who are struggling to come up with Down Payment and Closing Costs Funds to purchase a house should talk to their parents to find out if they have a Life Insurance Policy on them with Cash Value.  If they do, and the parents are willing to make the Life Insurance Policy available to them, those funds can then be withdrawn for purpose of purchasing a house.

Can Life Insurance Be A Source Of Down Payment Funds?  Yes they can, so why not consider them as a source of funds for the purchase of a home if other funds are not available?

 

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 Info about the author:

George Souto NMLS# 65149 is a Loan Originator who can assist you with all your #FHA, #CHFA, and #Conventional #mortgage needs in Connecticut. George resides in Middlesex County which includes #Middletown, #Middlefield, #Durham, #Cromwell, #Portland, #Higganum, #Haddam, #East Haddam,# Chester, #Deep River, and #Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com