Your dependents are protected by a life insurance policy in the case of your death. This is accomplished by paying out a predetermined amount designed to replace the policyholder’s income.
Your policy’s cash value is paid out over time if you have whole or universal life insurance coverage. The funds can then be withdrawn and used for a variety of purposes, including debt repayment.
If you are in the market for life insurance or wish to transfer your current policy to one that includes a cash option, now is the time to act. You can obtain a quote immediately.
Here’s how to utilize your strategy to reduce debt.
How to utilize life insurance to pay off debt
Using your life insurance to pay off debt could save you hundreds or thousands of dollars in total interest. This only applies to products, such as whole or universal life insurance, that accumulate cash value. Term life insurance does not accumulate a cash value, thus consumers cannot withdraw money from their policy.
If you have whole life insurance, however, it may be easier to withdraw funds from your provider than from a bank or credit union. Because there is no credit check required to obtain the funds. And you’ll enjoy more accommodating repayment arrangements. Note that any debts you incur will eventually be deducted from the death benefit.
You may also owe taxes on the amount withdrawn, depending on the amount withdrawn. For instance, if your cash value earned dividends, you may owe taxes on the dividend payments if you withdraw them from your insurance. You can normally withdraw tax-free funds up to the amount you’ve already paid toward your premium.
Consult with your life insurance agent to ascertain with precision whether you will owe taxes on the cash value amount.
Advantages of utilizing life insurance to repay debt
You may pay less overall interest if you pay off the debt faster.
You can lower your ratio of debt to income.
You can free up additional funds for saving and investing. You are not required to repay the loan.
Negative aspects of utilizing life insurance to repay debt
By subtracting a portion of the cash value, you will ultimately reduce the death benefit.
You can end up having to pay surrender fees (a fee for withdrawing money during a set period of time, usually in the immediate years after opening a new account)
Do you believe you would profit from a cash-out option insurance policy? There are various companies who can assist you select a suitable plan.
Other debt relief alternatives
Not certain if you wish to utilize the cash value of your life insurance? Here are some other debt relief solutions.
Consolidation of debt loan
A debt consolidation loan is a personal loan that can assist with debt repayment. Additionally, you may be able to pay off various loans with a debt consolidation loan, leaving you with only one payment.
The interest rates on debt consolidation loans vary based on your credit score, income, and total loan amount. Interest rates for debt consolidation loans typically range from 6 to 20 percent.
Personal loan terms range between two and seven years. Higher interest rates and lower monthly payments are associated with longer periods, whereas lower interest rates and higher monthly payments are associated with shorter terms. Choose the term with the most affordable monthly payment.
Transfer balance credit card
If you have credit card debt, you can establish a balance transfer credit card with a 0% intro APR and transfer your existing balance to it. Credit card providers offer 0% APR for a limited duration, often between six and twenty-one months.
If you are able to settle the balance before the deal ends, you might save hundreds of dollars in interest charges. The interest rate will increase once the deal ends, depending on your credit score and other circumstances. The average balance transfer cost on credit cards is approximately 3%.
You can save money by refinancing current loans at a reduced interest rate. If you have a loan with a high interest rate, refinancing could help you reduce your monthly payments and the total amount of interest you would pay. In recent months, the refinance rate environment has shifted, but you may still profit from refinancing your home or student loan.
If you decide to use your cash value to pay off debt, you should examine how this would effect your family’s life insurance requirements. If you are retired and no one depends on your income, you are likely self-insured and do not need to get an insurance.
However, if you are still employed, have a family, and have outstanding mortgage payments, you should determine how much coverage you need and how to replace your policy if its cash value is depleted or reduced. You might obtain life insurance coverage while paying a reduced monthly price by purchasing a term policy.
Consult with an insurance specialist who can lead you toward a plan that meets your needs and financial objectives.