How to Use Life Insurance to Pay Off Debt

Life insurance is a valuable financial tool primarily designed to protect your loved ones during your death. It can also be a resource for managing and paying off debt while still alive. 

If you have a whole life or universal life insurance policy, you have accumulated cash value that can be accessed during your lifetime. Depending on your policy’s terms, you may be able to use the cash value to pay off debt in the following ways:

• Withdrawals—This can be a straightforward way to access funds to pay off debt. Depending on the amount and the policy’s structure, withdrawals may reduce the death benefit and could have tax implications.

• Policy loans—Some permanent life insurance policies allow you to take out a loan against the cash value. The loan terms are generally favorable, and you can use the funds for any purpose, including debt repayment. Interest is charged on the loan, but it will reduce the death benefit if it’s not repaid.

• Surrendering the policy—If you no longer need the coverage or prefer to use the cash value, you can surrender the policy for a lump sum payment, which can be used to pay off debts. However, surrendering a policy means you’ll lose the insurance coverage, and there might be surrender charges or tax consequences.

Evaluating the Impact on Your Financial Plan

Before using life insurance to pay off debt, consider the following:

• Impact on coverage—Using the cash value or surrendering your policy may affect your coverage. Evaluate whether you still need life insurance and how its reduction might impact your family’s financial security.

• Tax implications—Withdrawals and loans from the cash value of a life insurance policy can have tax implications. Consult a tax advisor to understand how these actions might affect your tax situation.

• Policy terms—Review your policy’s terms and conditions regarding withdrawals, loans, and surrenders. Each policy has different rules and understanding them will help you make informed decisions.

Contact Us

Contact The Marvelous Associates to learn more about how life insurance can help pay off debt and get a personalized life insurance quote.

This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.