When searching for the right construction financing for a planned home purchase, some stumble upon the option of running their real estate financing through a life insurance company. So-called insurance loans, however, are only worthwhile in certain cases where tax advantages are in the foreground. But how does construction financing via life insurance work in the first place??
Life insurance and grace loan in combination
In construction financing, consisting of life insurance and a loan, the loan is repaid at the end of the agreed term by means of the life insurance policy. In fact, just a few years ago, this option was very common.
The reason: the income from the life insurance was tax-free.
Today, tax regulations of that time no longer apply, so that the savings opportunities in this way were greatly reduced. The combination of both components is therefore only interesting for a few builders, unless a corresponding life insurance already exists and can be brought into a planned financing.
When do builders and homebuyers benefit from the option??
If you already have a life insurance policy, you can use it as a repayment module for your construction financing. To what extent this is worthwhile in the end effect, should be calculated exactly. The focus is on the return after deduction of all costs. If the life insurance generates a higher return than the interest on the loan, the model is worthwhile.
Policyholders whose life insurance policy has the following features have a good chance:
- The life insurance policy was taken out before the 31st birthday. December 2004 closed
- Policyholders have already been paying into life insurance for more than 5 years
- The premium can be paid out in one go
- The term of the life insurance was set at a minimum of 12 years
If all these factors fit your own contractual circumstances, the income from the life insurance policy does not have to be taxed.
This is how construction financing by means of life insurance works
The typical real estate financing consists of a repayment installment and an interest portion, which the borrower pays monthly. If the property is financed through a life insurance policy, the repayment installment is omitted. Instead, the borrower will continue to pay into his life insurance policy, resp. continue to save for it.
At the end of the term, the remaining debt mountain is to be paid out by means of the life insurance in which savings have been made in the meantime. Ideally, the income from the life insurance is then so high that the loan can be repaid with immediate effect.
Thus, the financing is completed faster than usual and no follow-up financing is required. Optimally, the amount distributed via life insurance is even higher than the bullet loan amount.
Why this calculation does not work out in many cases, however, has several reasons that should be taken into account when making a decision.
- Who a life insurance after the 1. January 2005 locked, which must tax the yields from it.
- Newly concluded life insurance policies contain much lower guaranteed interest rates, which have continued to fall in recent years.
- In addition to the poor guaranteed interest rates, the surplus participations are to be calculated, which depend on the success of the policy. Due to the current low interest rate, the amount is rather uncertain.
Owner-occupiers and capital investors – who benefits??
It is a fact that due to today's situation, construction financing with newly concluded life insurance policies is no longer really interesting. Especially not for owner-occupiers. The only advantage is that buyers are protected in the event of death.
For this reason alone, however, a combination of loan and new life insurance is not worthwhile, because cheap term life insurance can offer just as good protection here. Even if no parallel assets are saved with a term life insurance policy.
Life insurance and home purchase for capital investors can be worthwhile
Construction financing with life insurance can still be worthwhile, even if it is mainly capital investors who are addressed here. The reason: Capital investors can make the interest of the loan as Werbungskosten tax deductible, owner-occupiers can not.
In the case of a typical annuity loan with a repayment rate, the interest portion decreases over the years, as the remaining debt is logically also reduced. Means that also the tax saving decreases annually ever further. The way over the construction financing by means of life insurance can be perfect here even, since the remaining debt of the loan does not change over the entire term. The monthly interest to be paid remains constantly high, which means an enormous tax reduction.
But: Certainly, it also depends on the extent to which the life insurance was successful and how high the returns from it are. In the case of old policies, the situation is clear: the returns can often exceed the loan. With newly closed life insurances, a certain risk must be calculated and reckoned with.
Investors are advised to consult a tax advisor at this point. Above all, construction investors who have to pay high tax rates and rent out their financed properties should by no means underestimate the bureaucratic effort involved. With financings it depends fiscally above all on the incomes from letting and leasing as well as on the kind of income. The extent to which insurance loans are worthwhile should always be discussed with an expert in the field.
Always manage yield forecasts with caution
Many insurers have had to revise their income forecasts downward in recent years. In the worst case, this means for investors that the sum saved from the life insurance policy is not sufficient to repay the loan in one go.
Our tip: Future builders should only plan with the guaranteed interest rate of the life insurance and not with possibly occurring forecast figures. Because: If the surplus is not as high as hoped, builders will have to refinance.
Protecting the family
Insurance loans of course also offer a few advantages, above all the protection in the event of death. This is why banks usually require life insurance to be taken out. If the borrower dies, the insurance policy is paid out to the surviving dependents. This allows dependents to pay off the loan to become debt-free. Term life insurance right at the beginning of the term or residual debt insurance, can be a good alternative if the combination of life insurance and construction financing is not worth it.
The life insurance house purchase is often not worthwhile
The income from current life insurance policies must be taxed. A combination with a construction financing loan is no longer worthwhile for self-users for this reason. However, investors can still take advantage of the tax deduction of the interest on the loan. In this case, it is sometimes worthwhile to pay into the life insurance instead of the repayment installments. However, the timing of the life insurance policy taken out plays a role even then.