Permanent life insurance policies not only come with life insurance that lasts forever, but they also come with an investment known as the cash value.
The cash value is a unique type of investment with specific characteristics.
For one, all the growth within the cash value is tax-free.
This means any dividends you receive on an annual basis will increase your investment, but there are no any annual taxes to pay.
The cash value even grows tax-free if your corporation or holdco owns the policy.
What can you do with the cash value?
Anything you’d like, but many people use it to buy real estate.
How do you buy real estate with the cash value?
This is very similar to putting a mortgage on a home. When getting a mortgage, your home is the asset being used as collateral and the lending institution loans you money against the asset.
In the case of an insurance policy, the cash value acts as the home, and the insurance company uses the cash value as collateral and loans you money against it.
The loan is in the form of a line of credit and on a tax-free basis.
Interest will be charged on the line of credit, but depending on what you use the line of credit for, the interest may be tax deductible.
If you are purchasing real estate, the interest would be tax-deductible.
It is a very simple process to be able to borrow against your policy. Its much easier then trying to get approved for loans or credit through the traditional lending channel. Many people who may be maxed out on their TDS and GDS ratios, or whose income may not be sufficient to borrow what they want, can rely on their life insurance policy for the additional capital.
In fact, it is guaranteed that you have access to the cash value. It is in the contract you sign with the insurance company.
Do you have to pay off the line of credit? Not necessarily. You can continue to pay the interest instead of paying off the loan. Many people use the rental income they are collecting to pay the interest or loan.
If the life insured passed away with a balance owing on the line of credit, the balance would be paid off with the life insurance proceeds. For example, if the life insurance policy was for $2,000,000 but $300,000 was still owed, $1,700,000 would be paid net to the beneficiary.
Keep in mind, a permanent life insurance policy not only comes with the cash value, but you also have the permanent life insurance, which is paid to your beneficiary tax-free. These tax-free proceeds will help pay the capital gains taxes you will eventually owe on your secondary properties (rental properties, family cottage, vacation home, office etc).
Purchasing a permanent life insurance policy can and will help you acquire more properties during your life time, and most importantly, help you keep these properties in your family for future generations.