Using your permanent life insurance policy to pay off your mortgage faster is a concept of making additional payments on your permanent life insurance policy to build up cash value that can then be withdrawn or taken out as a loan. to pay the balance of the mortgage.
The idea is to overpay permanent life insurance premiums to build a cash cushion within the policy that grows tax-free over time. Then, instead of making all scheduled monthly mortgage payments for 15 or 30 years, a lump sum of the cash value built up in the insurance policy can be withdrawn to pay off some or all of the remaining mortgage balance, reducing drastically the term of the debt.
This allows you to pay off your mortgage much sooner, saving tens of thousands in interest. Additionally, by shortening the term of the mortgage, you increase the portion of the monthly payment that goes directly to principal instead of interest. This creates a virtuous cycle that further accelerates the amortization process.
## How does it work?
The strategy of using permanent life insurance to accelerate mortgage payment consists of the following:
1. Purchase a permanent life insurance policy that accumulates cash value over time. This is achieved by paying periodic premiums that exceed the cost of the insurance itself.
2. Once the policy has accumulated considerable cash value, loans or withdrawals can be made against that policy. Many policies allow you to withdraw up to 90% of the accumulated value.
3. That money borrowed from the policy can be used to make advance payments towards the mortgage principal. This reduces the balance and shortens the overall term of the mortgage.
4. Loans or withdrawals against the policy are repaid from regular income. At the same time, premiums continue to be paid to keep the policy active.
5. If the policyholder dies before repaying the loan, the insurance covers the balance owed. Beneficiaries receive the remainder of the accumulated cash value.
6. By accelerating the mortgage payment, you save interest and pay off the house faster. All of this is accomplished by leveraging the cash value built up in the life insurance policy.
Using permanent life insurance to pay off your mortgage faster can have several financial advantages:
Create a financial cushion with life insurance - The cash value of permanent life insurance can serve as a financial cushion for you or your beneficiaries. If you die, the beneficiary will receive the insurance payment tax-free. If you do not die, you will have access to the cash accumulated in the policy.
Lower interest on insurance loan vs. the mortgage - Life insurance loans typically have a lower interest rate than mortgages. Paying off your mortgage with an insurance loan allows you to replace high-interest debt with low-interest debt.
Potential Tax-Free Growth - The cash value of the permanent life insurance policy can grow tax-free. This allows you to build up additional equity to pay off your mortgage. The growth would be taxable if you withdraw it.
Using permanent life insurance to accelerate a mortgage payment has some disadvantages to consider:
- Initial policy costs - Premiums in the first few years can be high, as some of that money is used to cover the costs of issuing the policy. This means that accelerating the mortgage in this way requires a significant initial outlay.
- Not everyone qualifies for this type of policy - Insurers evaluate health status and other risk factors before issuing a permanent life policy. If you have certain medical conditions, it may be difficult or impossible to qualify.
- Requires discipline to maintain premiums - You must commit to paying annual premiums to keep the policy active and be able to use the accumulated cash. Failure to pay may cause the policy to lapse and the invested funds to be lost.
## Types of policies indicated
Permanent life insurance can be a good option to speed up mortgage payments if you choose the right type of policy. There are three main types to consider:
### Permanent life insurance
Permanent life insurance provides coverage for the entire life of the insured. Premiums are typically higher than other types of insurance, but remain the same over the years. A portion of the premium goes to create a cash fund within the policy. This cash fund can be used later to pay premiums or withdrawn in cash.
### Universal life insurance
Universal life insurance works similarly to permanent life insurance, but with more flexible premiums. Allows you to adjust the mounter premium each year, which can be helpful if you need to reduce payments at some point. It also accumulates a cash fund within the policy.
### Indexed life insurance
In indexed life insurance, the cash fund within the policy is invested in the stock market. This allows you to obtain a higher return, although it carries more risk. Premiums are usually lower initially because part of the return covers insurance costs.
Any of these three types can work well to accelerate a mortgage, as long as you choose a policy with premiums that you can comfortably pay. Long-term costs must be carefully considered when making the choice.
## Calculate costs
A key consideration is calculating how much the annual premium for permanent life insurance will cost compared to your current mortgage payments. This will help you determine if using life insurance to pay off your mortgage faster makes financial sense for your situation.
To calculate it, you need:
- Your current mortgage
- The mortgage interest rate
- The remaining term of the mortgage in months
- An estimate of the annual premium for the permanent life insurance policy you are considering
Use an online loan amortization calculator to determine how much you currently pay in interest each year on your mortgage. Then compare that to the estimated cost of the annual permanent life insurance premium.
For example, if you currently pay $5,000 in interest per year on your mortgage, but your annual life insurance premium is $10,000, it may not make sense financially because you would be paying more in premiums than you would save in mortgage interest.
However, if the annual premium is less than your current interest payments, using the policy to pay off your mortgage faster could save you money in the long run.
Also estimate how long it would take you to pay off the mortgage if you used the cash value of permanent life insurance to make additional principal payments. This will give you an idea of how much you can speed up the payback process if you use this strategy.
Comparing estimated premiums, interest, and payback times will help you determine whether using permanent life insurance to pay off your mortgage faster is a good financial decision for your particular situation.
## Qualification requirements
To qualify for permanent life insurance, applicants generally must meet certain health, income, and credit requirements.
### Health requirements
- Most insurers will require a medical exam as part of the application process. This may include blood tests, blood pressure tests, electrocardiograms, and more.
- In general, the applicant is expected to be in good health and have no serious pre-existing conditions. Health problems such as heart disease, cancer, poorly controlled diabetes, or substance abuse can disqualify you or significantly increase premiums.
### Minimum income
- Insurers will want to see that the applicant has stable and sufficient income to pay the annual premiums. Many require a minimum income of $40,000 to $50,000 a year.
- They will also consider your total assets, including real estate, savings and investments, to determine your long-term ability to pay. Having solid liquid assets improves your chances.
### Credit rating
- A fair credit score or better (620+) will assist with approval. A low score may result in higher premiums or denial of coverage.
- Payment history, existing debt and length of credit are taken into account. Paying bills on time and avoiding recent bankruptcies or lawsuits helps.
## Tax considerations
The life insurance premium deduction is subject to certain limitations. Premiums paid can generally be deducted as medical expenses on your tax return, but the deductible amount is capped based on income.
When withdrawals or loans are made from your permanent life insurance policy, a portion of the money received may be subject to taxes. This is because a portion of the value built up in the policy comes from investment earnings, not just premiums paid.
Withdrawals are taxed as ordinary income up to the amount of the earnings. Once all accumulated earnings income is withdrawn, subsequent withdrawals are not taxed.
There are some strategies to minimize the tax burden on withdrawals, such as not withdrawing more than the premiums paid each year, or making withdrawals during years of lower taxable income. A financial advisor can help you plan for withdrawals in a tax-efficient manner.
In addition to using the cash value of permanent life insurance to pay the mortgage, there are a few other options to accelerate the payment of mortgage debt:
### Pay extra directly to the mortgage
One of the simplest ways is to make additional payments directly to the mortgage balance. This reduces the principal owed and allows you to pay off the mortgage faster. Convert some or all of your bonuses, cash gifts or additional income into extra payments. Check with the bank about how to apply them directly to the capital.
### Refinance at lower rate
If interest rates have dropped since you took out your original mortgage, refinancing to a lower rate will lower your monthly payments. This allows you to take the money you were paying in interest and apply it to reducing the principal owed. Shop current rates and estimate potential savings before refinancing.
### Evaluate different types of insurance
In addition to permanent life insurance, there are other policies such as term insurance that also accumulate cash value. Compare premiums and benefits to find the best option for your needs. A financial advisor can guide you in choosing the most appropriate type and amount of coverage.
## Tips to implement
Many people use permanent life insurance as a way to speed up their mortgage payments. However, it is important to keep a few tips in mind to ensure it is implemented in the most efficient way.
- Compare multiple quotes - As with any financial product, it is important to compare quotes from multiple insurance companies. Costs and benefits can vary, so spend time shopping around to find the best deal.
- Use an expert advisor - Hiring a financial or insurance advisor with experience in permanent life insurance can help navigate the process and find the best policy. Advisors can explain complex details and offer personalized recommendations.
- Start as soon as possible - The sooner life insurance is implemented, the greater the compounding effect and growth potential of the policy. This allows you to maximize the benefits to pay off the mortgage as soon as possible. Ideally, it should be started before the age of 40.
- Monitor progress - Once the policy is implemented, it is important to regularly monitor its performance and projections. This allows adjustments to be made if necessary to stay on track toward the goal of paying off the mortgage. It also allows you to take full advantage of tax benefits.
With careful implementation and monitoring, permanent life insurance can be a powerful financial strategy to accelerate mortgage repayment. Comparing options, getting expert advice and monitoring progress are key to maximizing benefits.