How to use life insurance to pay off debt
A life insurance policy protects your heirs in the event of death. To do this, it pays a predetermined sum intended to replace the income of the insured.
If you have whole or universal life insurance coverageyour font comes with a cash value that you pay over time. You can then withdraw that money and use it for a variety of reasons, including paying off debt.
If you’re looking for life insurance or want to change your type to include a cash option, now is a good time to act. You can get a quote now.
Here’s how to use your plan to help pay off your debts.
How to use life insurance to pay off debt
Using your life insurance policy to pay off your debts could save you hundreds or even thousands in interest. This only applies to policies that accumulate cash value, such as whole or universal life insurance. consumers with term life insurance do not accumulate cash value and therefore cannot withdraw money from their policy.
If you have whole life insurance, however, withdrawing money through your provider may be easier than going to a bank or credit union. This is because there is no credit check to obtain the funds. And you will benefit from more generous repayment terms. Just note that whatever you owe will eventually come out of the death benefit.
You may also owe taxes on the amount withdrawn depending on the amount you withdraw. For example, if your cash value has generated dividends, you may have to pay taxes if you withdraw those dividend payments from your policy. You can usually withdraw money up to the amount you have already paid for your premium without having to pay taxes.
Speak to your life insurance agent to accurately determine whether you will have to pay taxes on the cash value amount.
Benefits of using life insurance to pay off debt
- You may be able to pay less total interest by paying off the debt sooner
- You can reduce your debt ratio
- You can free up more money to save and invest
- You don’t have to pay it back
Disadvantages of using life insurance to pay off debt
- By deducting part of the cash value, you will end up reducing the death benefit later
- You might end up paying a redemption fee (a fee to withdraw money for a set period of time, usually in the years immediately following opening a new account)
Do you think you would benefit from an insurance policy with an opt-out option? There are several providers that can help you find a plan that’s right for you.
Other Debt Relief Alternatives
Not sure you want to use the cash value of your life insurance? Here are some other debt relief alternatives.
debt consolidation loan
A debt consolidation loan is a Personal loan who can help you pay off your debts. You may also be able to repay multiple loans with one debt consolidation loan, so you are only responsible for one payment.
Debt consolidation loan interest rates vary depending on your credit score, Income and the total amount of the loan. Typical interest rates for debt consolidation loans range from 6% to 20%.
Personal loan terms range from two to seven years. Longer terms have higher interest rates and lower monthly payments, while shorter terms have lower interest rates and higher monthly payments. Choose the term with the monthly payment that you can easily afford.
Balance transfer credit card
If you have credit card debt, you can open a balance transfer card with 0% APR and transfer your current balance to this card. Card companies will offer 0% APR for a limited time, usually between six and 21 months.
If you can pay off the balance before this offer expires, you could save hundreds in total interest. Once the offer expires, the interest rate will change to a higher rate, depending on your credit score and other factors. Most cards charge a balance transfer fee, usually around 3%.
Refinancing existing loans at a lower interest rate can help you save money. If you have a loan with a high interest rate, refinancing it could help lower your monthly payments and reduce the interest you would pay over the life of the loan. The refinance rate environment has changed over the past few months, but you could still benefit from refinancing your mortgage or student loan.
The bottom line
If you end up using your accumulated cash value to pay off your debts, make sure you consider how this will affect your family’s life insurance needs. If you’re retired and no one is counting on your income, you probably don’t need to buy a policy because you’re self-insured.
But if you’re still working, have a family, and have outstanding mortgage payments, you need to figure out how much coverage you need and how to top it up if your cash value runs out or is reduced. You can purchase a term life insurance policy to maintain life insurance coverage while paying a lower monthly premium.
It’s helpful to talk to an insurance expert who can guide you to a plan that works for you and your financial goals.