If you’re looking to buy a house, you may wonder how you’ll afford it. With median home prices topping $400,000 in 2024, you need a sizable down payment to keep the monthly mortgage affordable.¹ Savings can help, but what if it’s not enough? One tool you may be overlooking is your life insurance policy.

Life insurance provides death benefits to designated beneficiaries if you die. But some policies also accumulate cash value, which you can tap into while living. You can use the money for any purpose, including a down payment on a home. Banks may accept life insurance as collateral, which can help you qualify for a mortgage or secure a lower interest rate.

If you use your life insurance policy to buy a home, know it can impact your death benefits and premiums. Keep those considerations in mind as you weigh your options.

Borrowing Against Cash Value

Permanent life insurance policies have two components: death benefits and cash value. Death benefits go to your designated beneficiaries when you die, and the policy’s cash value builds as you make premium payments. You can borrow against a policy’s cash value to pay for things you need — including buying a home. The loan feature is only available on permanent life insurance policies, not term life insurance coverage.

Life insurance loans work similarly to other lines of credit. You borrow money and repay it over time. You’ll pay interest on the loan, which is usually much less than through other lending sources.² Plus, if the policy’s cash value includes any investment gains, you can borrow against them without triggering taxes so long as the policy remains in force.³

Insurers don’t require a credit check to take out a loan against your policy, and it won’t appear on your credit report.² That benefits homeowners seeking to maximize their credit score when applying for a mortgage.

However, taking out a loan against an insurance policy has a few drawbacks. It may temporarily reduce the policy’s death benefits until you satisfy the loan.  If you die with a loan balance, the insurer reduces the benefits by the amount you owe.²

Using a Life Insurance Policy for Down Payments

If you decide to use your life insurance policy’s cash value for a down payment on a home, contact your insurer to determine your options. You may be able to retrieve loan options through your insurance company’s website portal or app. If you don’t see any information about cash value loans, call the insurer’s customer service line.

Pay close attention to the terms of a cash value loan, including its interest rate. You repay life insurance loans on your own schedule.² However, interest may grow quickly, and it can creep on you if you don’t make repayments.

Also consider the loan’s impact on the policy’s death benefits. You bought life insurance to protect people who rely on you financially, so you don’t want to leave them in a lurch if something unexpected happens to you.

One alternative that can mitigate the risk to beneficiaries is buying term life insurance coverage. A term policy offers cheaper premiums than a permanent policy, and you can choose a death benefit that covers the gaps in your permanent coverage while repaying your loan.

Life Insurance as a Collateral Assignment

Borrowing against a life insurance policy isn’t your only option when buying a home. Another alternative is a collateral assignment.

In a collateral assignment, you name your mortgage lender as the primary beneficiary of your life insurance policy. Your other designated beneficiaries become secondary beneficiaries. If you die, the lender receives death benefits equal to the remaining amount on your mortgage. If there is any money left over, it goes to your secondary beneficiaries.⁴

Using your life insurance policy as collateral can boost your chances of qualifying for a mortgage.  It may also help you get a lower interest rate, reducing your monthly mortgage payments.⁵

However, most lenders only accept permanent life insurance coverage for a collateral assignment.⁴ Getting approval with a term life insurance policy isn’t as common. That’s because a permanent policy’s cash value component provides extra security if you fall behind on payments. You don’t need to die for the lender to access the money.

If you decide to pledge your life insurance as collateral for a mortgage, it becomes part of the contract. You must maintain coverage until you pay your debt or sell the property. If you cancel the policy, it may violate your mortgage agreement. The lender may impose financial consequences, like a higher interest rate.⁵

Using the Death Benefit for Mortgage Protection

As the primary payer on your family’s mortgage, you may worry about what will happen if you die. Life insurance can help alleviate your concerns.

You can name your spouse, partner, or other trusted person as the beneficiary on your life insurance policy. They can use the death benefits to pay off the mortgage, guaranteeing they have a place to live.

However, beneficiaries can use death benefit proceeds any way they like. If you worry that your dependents won’t use the money to pay off the mortgage, you might talk to an attorney about your estate plans. There may be a way to clarify your wishes to use the death benefits to pay off the family home.

Another option is purchasing mortgage protection life insurance (MPI). An MPI policy is similar to term life insurance coverage, but the beneficiary is your mortgage lender. It’s a type of guaranteed issue life insurance, so pre-existing health conditions and occupation won’t preclude you from qualifying. However, insurers may deny older applicants since there’s a greater risk of payout.⁶

An MPI policy’s premiums stay the same throughout your policy, even as the mortgage balance declines. Your coverage ends once you pay off the mortgage. If you die before paying off the home, the death benefits transfer directly to the mortgage lender, giving your heirs a paid-off place to live. However, your beneficiaries don’t receive any other death benefits from the policy.⁷

You can acquire MPI coverage through your lender or a private insurance company. Some life insurance companies also offer MPI.⁶ It’s usually only available when you close the mortgage or shortly afterward.⁷ If you miss the opportunity to buy MPI, a regular life insurance policy is your alternative.

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Pros of Using Life Insurance for a House

Life insurance can help you buy your next home. Some advantages it offers include:

Down Payment Assistance

Coming up with a hefty down payment can be hard, especially if you don’t have much savings. A permanent life insurance policy offers loan options to borrow against the cash value. The loan can help you meet a lender’s down payment requirements.

Better Interest Rates

Some lenders may accept your permanent life insurance policy as collateral for a mortgage. The collateral hedges against missed payments and the risk that you die before paying off the loan. The lender may offer more favorable loan terms in exchange for pledging a life insurance policy, including a lower interest rate.

Protect Your Family

Buying MPI gives you peace of mind your family won’t lose the home if you die before paying off the house. If MPI isn’t an option, you can buy a term life insurance policy and ask your beneficiaries to use it to pay off the mortgage.

Cons of Using Life Insurance for a Home

If you decide to take out a loan on your life insurance policy or use it as collateral, be aware of a few potential drawbacks.

Loan Payments

Borrowing against a life insurance policy means you’ll have a new loan to repay. Your loan includes interest, and you’re responsible for repaying it on your own timeline. If you don’t repay the loan, your policy may lapse if the amount you owe exceeds the policy’s cash value.⁸

Reduced Death Benefits

A life insurance loan reduces the death benefits available for beneficiaries. If you die with an outstanding debt, the insurance company will use the proceeds to repay the remaining balance. Anything left over will pass to your beneficiaries, but it may not be the entire amount you planned on when you bought your policy.

Pledging your life insurance as collateral for a mortgage results in a similar situation. If you die, the lender uses the death benefits to pay off the mortgage. However, your family owns the house and won’t need to make further loan payments, provided the death benefits satisfy the outstanding balance.

Life Insurance Can Make It Easier to Buy a Home

A life insurance policy can play a big role in purchasing a home. It can help you afford a down payment and qualify for better financing. You can even buy special coverage designed to pay off your mortgage so your family doesn’t lose the home if you die.

If you believe life insurance can benefit your homeownership goals, consider your options carefully. Borrowing against a policy results in a loan, and pledging your policy as collateral reduces the death benefits available to your loved ones. Purchasing MPI secures shelter for your family but is an extra monthly expense that can impact your cash flow. However, if the benefits outweigh the drawbacks in your situation it may be worth using life insurance when buying your next home.

Fidelity Life offers a range of life insurance products, including affordable term life insurance coverage. Explore your options and get a free quote today!

At Fidelity Life, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed, and updated regularly to ensure the information is as relevant as possible. We encourage you to speak with your insurance representative if you have additional questions and make sure you read your policy contract to fully understand your coverage.

Article Sources:

1. Federal Reserve Bank of St. Louis. “Median Sales Price of Houses Sold for the United States (MSPUS), https://fred.stlouisfed.org/series/MSPUS”
2. nerdwallet. “When To Borrow Against Your Life Insurance Policy, https://www.nerdwallet.com/article/insurance/borrow-against-life-insurance”
3. John Hancock. “Income taxation of life insurance, https://sales.johnhancockinsurance.com/content/dam/JHINS/documents/life/advanced-markets1/Because-You-Asked/LIFE-7154_taxation_of_life_insurance.pdf”
4. Progressive. “What is collateral assignment of life insurance?, https://www.progressive.com/answers/life-insurance-collateral-assignment/”
5. Investopedia. “Can You Use Life Insurance to Buy a House?, https://www.investopedia.com/can-you-use-life-insurance-to-buy-a-house-7559583″
6. Rocket Mortgage. “Mortgage Protection Insurance Explained: Does Every Homeowner Need It?, https://www.rocketmortgage.com/learn/mortgage-protection-insurance”
7. Forbes Advisor. “Mortgage Life Insurance: Coverage & Benefits Explained, https://www.forbes.com/advisor/life-insurance/mortgage-life-insurance/”
8. Mass Mutual. “Life insurance: Treat cash value with care, https://blog.massmutual.com/insurance/life-insurance-cash-value-care”