To clarify right at the start. When we say that life policy is better than a mortgage, we are talking about mortgage as an investment tool, not mortgage to obtain your primary residence. We are in no way saying to make buying a life policy a higher priority than getting a place to live. Purchasing a primary residence and its rules of thumb are a different topic altogether. Here we will focus on the top 5 reasons why life policy is a better investment than a mortgage. When you buy a life policy, you’re buying either a whole life, cash building policy, or a term life, straight death benefit policy. The second one is designed more for asset protection than as an investment. So let’s look at the benefits of a whole life policy over a mortgage.
Top 5 Reasons Life Policy Is Better Than a Mortgage:
Mortgage to acquire real estate
Investment into real estate offers great growth potential. And yes, the longer you hold on to it, the higher it will grow. It is there for you, your kids and possibly generations to come. However, it isn’t free, and its growth is not guaranteed. To experience significant growth over a period of 5-10 years, you must time its acquisition perfectly. And that’s even if you pay in cash. As far as taking a mortgage to pay for your acquisition, the numbers take an even deeper hit. Important thing you have to keep in mind, is that first 50% your mortgage term is constructed for you to settle most of your interest.
So, after 10 years of a 20 year mortgage, your principal doesn’t change much. How did the real estate market perform? If prices didn’t go up, you’ve made virtually zero money, maybe even took a hit. And we’re talking about a 10 year investment with uncertain results.
Whole Life Policy Performance
Now, let’s compare that to a whole life policy. Starting on day one, you have your entire face value available to you in the form of the death benefit. Meaning that if you should pass away, your investment immediately takes care of the ones you’d leave behind. Beyond the death benefit, policy illustration provided to you gives you an outline of your investment and some guaranteed numbers. A real estate investment has zero guarantees in terms of profits. Mortgage only guarantees you numbers on interest owed. After 10 years of paying into a whole life policy, you are guaranteed to have some kind of cash available to you!
#4 ROI (Return on Investment)
The return on investment is a key indicator for all investors. In case of real estate you must take into consideration current market value and potential growth. These are all educated estimates at best. Once you make your acquisition, you can start praying for the real estate market not to crash. Because that’s about all the control you have. Real estate purchased even with even a 4% mortgage rate, still burdens your investment with a lot of interest due. This can literally crush your 10 year ROI. With life insurance you get minimum guaranteed values. Additionally, especially with mutual life insurance companies, you’ll also get some significant growth potential.
#3 Repairs and renovations
This one is a no brainer. Every real estate has to be maintained, repaired and renovated. This is an expense, which must also be figured in the ROI. And it is one component that a life insurance policy does not have. It is a straight up investment with an immediate value in its death benefit and a steady cash growth. Easily predictable with nothing to repair or renovate. Sure, you may want to update, upgrade or adjust it later on, but this doesn’t bear any unpredictable extra expenses.
#2 Maintenance fees
Real estate as an investment has a multitude of fees. We already mentioned repairs and and renovations, but it doesn’t stop there. Beyond these two, there are also taxes. Especially in states like California nad New Jersey, these can really put a hole in your ROI. However, there is more, beyond you having to pay a minimum to utilities for keeping the real estate powered up, even if no one lives there. Another set of fees are dues to co-op or HOA. These must be paid because the organization overseeing the operations of your real estate has costs as well. These must be paid regardless of whether the real estate is utilized by you or not. They’re not going to empty out the pool, or fire the concierge, only because you don’t use your apartment or house.
Sure, life insurance has fees, but compared to real estate ownership or mortgage, these are peanuts. It’s all a matter of perspective. If your’re interested in seeing the fees associated with a policy you are planning to purchase, simply ask your broker. These vary a lot company by company and also case by case. This is why it doesn’t make sense to get into details here.
#1 Cash Value
The big downside to owning a real estate is that there is no cash in it. If you become heavily invested into real estate, you may find yourself in an awkward situation. Your personal value will be millions of dollars, but you will not have $20 to your name to go food shopping tomorrow. Yes, this is a situation not uncommon in the real estate world. Lack of cash flow in real estate is a real thing. This is where life insurance wins by a landslide. Even after your mortgage is fully paid up, you are not liquid. Real estate’s value is only on paper. It can take months to make it liquid. Once you pay up your life insurance, the money is there, ready to tap into in a matter of days. This is true all along of course as well.
Taking care of money is not easy. There are a many aspects to consider. We just hope this article made a clear direct comparison between life insurance and mortgage. Which one of those you need, or can afford, well that’s something to be discussed in person. Let us know when you’re ready.