Can life insurance be used to pay off debt?

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Life insurance may include a way to access your funds before you die.

Key Point

• If you have a terminal diagnosis, you can receive your term life insurance death benefit early.
• To borrow against cash value in whole life insurance, you have to pay fees and interest.

Life insurance is a great way to provide a financial safety net for your loved ones, especially if you are in debt. Thinking about paying off debt while you’re still alive is a smart financial plan and a thoughtful gift for those who will be left behind if something happens to you. If so, it is natural to think about how you can use that asset to reduce your current debt and reduce the financial burden even a little while you are alive. Depending on the situation, it may be possible. Many life insurance policies have features that allow access to all or part of the value before death.

How to cancel term insurance

Term insurance has no cash value. A monthly premium is paid for a certain period (period), and if the insured dies during that period, the insurance company pays the death benefit to the beneficiary. Even if your term is over, if you’re still alive, you won’t get anything. These policies are attractive because term insurance premiums are typically much lower than whole life insurance premiums for the same death benefit. You get an economical safety net at a relatively low cost.

However, you may be able to receive your death benefit early. If your policy has an early death benefit rider (also known as a terminal illness benefit rider or living benefit rider) and you are diagnosed with a terminal illness, you can access a portion of your death benefit before you die. You can use that money to reduce your debt, cover your final arrangement, or pay any other expenses you choose.

Accessing death benefits early can affect your eligibility for Medicaid and Social Security, as well as your taxes.

How to cash out life insurance

Whole life insurance accumulates cash value over time as premiums are paid. Once you have cash value, you have the option to redeem it.

One option is to waive the policy. That means you get the whole cash value, but you’re giving up life insurance. Some policies allow partial surrender. This means that you will continue to be insured, but if you die, your heirs will receive less death benefit.

If the value received is greater than the total premiums paid, waiving the insurance may have tax implications.

Another option you may have is to borrow against your cash value. You are obtaining a secured loan from an insurance company using your cash value as collateral. One of the perks is that you usually automatically qualify for this loan. No credit check required.

The downside of borrowing against cash value is that you pay interest on top of the amount borrowed plus origination fees and other fees charged by insurance companies. Make sure the cost of this loan is lower than the cost of your current debt. Otherwise, it may not be worth paying off your debt using this strategy. Receive a full death benefit.

A third option is to sell whole life insurance. In exchange for cash, the purchaser becomes the beneficiary.

Should life insurance be used to pay off debt?

This is a personal question that only you can answer. Life insurance is a gift for loved ones, but it can also be a financial tool that you can use while you are alive. Leveraging it could mean less for the beneficiary. , you may be in better financial shape than you are now.