Life insurance can be used effectively to pay off a mortgage before it is due, and a UL or VUL contract is usually used. Assume you have a 30 year mortgage and a fixed interest rate load of 7.5%. If you believed you could earn 10% in equities over time, you might buy a variable universal life contract and "invest" money that would grow on a tax deferred basis. Fifteen or 20 years later, you could use preferred loans and partial withdrawals to take enough money out of your life insurance contract to pay off your mortgage. Under present tax law, this could be accomplished without triggering a gain on your insurance policies as long as you made sure you kept your premiums within limits so you retained your and tax benefits.

Optimally, this is best handled with a 30 year interest only mortgage. These mortgages keep your interest income tax deductions high. With regular mortgages you slowly lose your interest income tax deduction as more of your regular payment is applied toward principal. Interest-only mortgages are often combined with a life insurance contract to allow a borrower to maximize his interest deduction. And at the same time, they take advantage of the tax deferred accumulations and tax free distributions from a well structured life insurance policy.

This document was last modified on July 29, 1999 by LMLeber

Copyright ©1999, The Jacobs Company, All Rights Reserved