Buying a home is a significant investment that requires careful financial planning. One key aspect of buying a home is making a down payment, and coming up with one tends to be a source of stress for potential homebuyers. While there are various ways to save for a down payment, you may wonder if you can use your life insurance policy to help cover the costs. The good news is that it is possible to use life insurance for a down payment if you have the right type of policy. Let’s learn more about tapping into your life insurance policy for a down payment.
Rethinking Your Down Payment Strategy
Putting down 20 percent or more offers real benefits. It can help you avoid mortgage insurance costs like CMHC premiums, secure better interest rates, and reduce your monthly payments. But trying to hit that number at all costs doesn’t always make sense. If it means delaying your home purchase while prices climb, or draining your savings to the point where you have no financial cushion, the trade-off may not be worth it. Instead, consider other ways to strengthen your down payment. You might use the Home Buyers’ Plan through your RRSP, dip into your FHSA or TFSA, or look into borrowing against life insurance for down payment support. These options can help you boost your upfront contribution without sacrificing long-term financial stability.
Using life insurance for a down payment is becoming more common for those who want to keep their investments intact. If you use whole life insurance for down payment funds or take a life insurance loan for down payment purposes, you may be able to access capital quickly without relying on traditional credit. This can be helpful if you want to avoid mortgage insurance or make a stronger offer in a competitive market. The right approach depends on your overall financial picture, but a well-balanced down payment strategy should leave you with both equity in your home and enough liquidity to stay flexible.
Step-by-Step Guide to Using Life Insurance for Down Payment
If you have a permanent life insurance policy that has built up cash value, you might be holding a financial resource that could help you step into homeownership sooner.
Step 1: Find Out If You Have the Right Kind of Policy
You need the correct type of policy to use your life insurance policy as a down payment. Unlike term life insurance, which only covers you for a set period, a permanent life insurance policy covers you for your entire life and accumulates cash value over time. The more premiums you pay, the bigger the cash value grows. Once the cash value reaches a large enough balance, you can borrow against that value as you would on a credit card or loan. However, you will pay interest each month (or out of the death benefit) until the debt is repaid.
Some insurance companies also offer universal life insurance, allowing you to contribute extra money to the policy. This builds a larger cash value and more money to borrow from later. The only type of life insurance that you can’t use toward a down payment is term life insurance because it does not have a cash value to borrow from.
Step 2: Get the Right Advice
Before using life insurance for a down payment, talk to a financial advisor or insurance specialist, ideally someone who understands how tax rules and mortgage requirements work in Canada. They can walk you through the pros and cons, flag potential tax issues, and explain how a life insurance loan for down payment use might affect your long-term plans. A good advisor can also help you compare other options like the Home Buyers’ Plan (HBP), the First Home Savings Account (FHSA), or a TFSA, depending on what’s available to you.
Not all lenders accept borrowed funds for the minimum down payment, so your advisor can also help you structure and explain the source of funds properly, especially if you’re borrowing against life insurance for down payment flexibility or planning to use whole life insurance for a down payment.
Step 3: Inquire About the Policy’s Cash Value
If you decide to move forward after speaking with an advisor, your next step is to investigate the policy’s cash value and the rules for accessing it. Contact your provider to ask about the current cash surrender value, any applicable fees, and loan interest rates. Inquire if they use “direct recognition,” which can lower dividend payouts on borrowed amounts, and clarify how the death benefit will be affected as interest accumulates.
To avoid delays on a time-sensitive life insurance down payment, ask about minimum loan amounts and how long processing takes. It can take years for the cash value to grow enough to make a life insurance loan for down payment worthwhile, particularly if you’re borrowing against life insurance for down payment support or relying on whole life insurance for down payment flexibility. Just remember, using these funds will reduce the final payout to your beneficiaries.
Step 4: Choose the Best Way to Access Your Funds
Loan – A loan is the best choice if you still want to retain your life insurance coverage. The loan will have interest due, accumulating over time, so it is best to repay the loan as soon as possible if you intend to keep the policy for a long time. However, if you make the required premium and interest payments, there is no term limit, so you are not obligated to pay it back in any particular time frame. You should, however, be aware that some lenders will not allow you to borrow funds for your down payment. Typically, you must provide the minimum required funds yourself, but you could borrow to increase your down payment.
Withdrawal or Partial Surrender – When you withdraw or partially surrender your life insurance policy, you reduce your death benefit by the amount of cash withdrawn. If you have a high cash value relative to your death benefit, it could impact your policy significantly. It could also result in surrender fees during the first years of your policy. However, a withdrawal is a good option if you don’t mind a lower death benefit but still want to keep some life insurance coverage.
Full Surrender – If you want to access the total value of your life insurance policy and do not need to keep it in force, you can surrender your policy in full. Your life insurance policy will be gone when you do this, but you can access the total cash value minus any applicable surrender charges.
Step 5: Preparing Your Life Insurance Down Payment for Lender Review
Once you’ve accessed your funds, inform your mortgage broker or lender. They’ll likely want to see where the money came from, especially if you’re putting down less than 20 percent and need mortgage loan insurance. If you’re using a life insurance down payment, be ready to share documentation like a withdrawal summary or loan agreement, and clearly explain how you plan to handle any repayments. Timing matters. Life insurance transactions can take time, so start early to avoid last-minute delays.
Step 6: Keep an Eye on Your Policy After the Purchase
Even after using your life insurance for a down payment, your work isn’t done if you took out a policy loan. Borrowing against life insurance for a down payment can affect your coverage long-term if left unmanaged. As interest adds up, your loan balance grows, and if it ever exceeds the cash value, the policy could lapse. That triggers a tax bill on the unpaid loan balance, which gets treated as income, and you lose your coverage at the same time. To avoid this, review your policy annually, monitor the loan closely, and if possible, make interest payments or partial repayments. Whether you’re using whole life insurance for a down payment or another permanent policy, regular reviews help you avoid policy lapses and surprise tax bills.
Benefits of Borrowing from Your Life Insurance Policy for a Down Payment
A life insurance policy with cash value is a very appealing way to help with down payment costs for homebuyers. Here are a few other benefits of tapping into your life insurance policy to cover a down payment:
Lower Interest Rates and Mortgage Payments – When a down payment covers 20 percent of the purchase price (or more) instead of the minimum 5 percent, you may qualify for a lower interest rate, which means lower monthly payments too. You will also not have to purchase mortgage default insurance. All of this means more money in your pocket.
Coverage for Other Costs – Since a permanent life insurance policy can be borrowed against relatively easily, you can also access it for other expenses like the home inspection, renovations, moving costs, or furniture to make your home move-in ready.
Accessible Liquid Assets – Many policyholders use their cash value as a savings account to be accessed in an emergency. If they fall behind on their mortgage payments, they could borrow against the policy and use the funds to get up to date. This safety net gives mortgage lenders more confidence in a potential borrower, resulting in lower interest rates.
Using Life Insurance for Your Down Payment
Using life insurance for a down payment can be a viable option for some homebuyers. Still, carefully consider the implications of borrowing from your cash value before deciding. While life insurance can provide a source of cash to cover a down payment, it’s important to remember that borrowing against your policy can reduce its value and may have tax implications. Make sure that you still have enough coverage to protect your loved ones in the event of an unexpected death. Considering all available alternatives and making an informed decision that aligns with your long-term financial goals is essential. Your financial advisor and insurance provider can help determine if this approach is right for you.
