Can Life Insurance be Used to Pay Off Debt?

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Life insurance can include ways to collect the money before you die.

Key points

  • You can get long-term death benefits if you have a terminal illness.
  • To borrow against the cash value of your whole life plan, you will pay fees and interest.

Life insurance is a great way to provide financial protection to your loved ones, especially if you have debt. Thinking about debt payments while you’re still alive is smart financial planning, and it’s a great gift for those who might be left behind if something happens to you. If you’ve been paying for life insurance, it’s natural to wonder if you can use the money to reduce your debt now and eliminate other financial problems while you’re still alive. Depending on the situation, you can. Most life insurance policies have a feature that allows all or part of the value to be paid out before the person dies.

How to get long term insurance

Term insurance has no cost. The way it works is to pay monthly payments for a set period of time (the term), and if you die during this period, the insurance will pay the death benefit to the beneficiaries. If the word ends and you’re still alive, you get nothing. These policies are attractive because life insurance premiums are often much lower than whole life insurance premiums for immediate death benefits. You get financial security at a very low cost.

However, there are times when you can get your death benefit quickly. If your plan has accelerated death coverage (also called critical illness or high-cost coverage), and you are diagnosed with a terminal illness, you may receive a portion of your death benefit before you die. You can use the money to pay down debt, pay off your plan, or pay any other expenses you choose.

Getting your death benefit early can affect your taxes, as well as Medicaid and Social Security eligibility.

How to get permanent insurance

Permanent life insurance pays more over time as you pay your premiums. When you have the money value, you have the opportunity to enter.

One way is to give the plan. This means that you get full income but you provide life insurance. Some policies allow for a small surrender. This means you keep the policy but when you die, your heirs receive a smaller death benefit.

Surrendering your policy may affect your taxes if the value you receive is greater than the amount you paid.

Another option you may have is to borrow according to your net worth. In this case, you are not withdrawing your money. You are taking out a secured loan from an insurance company, using your personal income as collateral. One benefit is that you will receive this loan automatically. No credit check is required.

The downside to borrowing with cash value is that you will pay interest on the amount you borrow, plus any interest and other insurance premiums. Make sure that the value of this loan is lower than the value of your current loan, or it may not be practical to use this method to pay off your loan. If you die before repaying the loan, your heirs will receive the entire death benefit minus the amount you still have.

The third option is to sell your life insurance. In exchange for money, the buyer becomes the beneficiary.

Should you use life insurance to pay off debt?

This is a personal question that only you can answer. Life insurance is a gift to your loved ones, but it can also be a financial tool that you can use while you’re still alive. Going in may mean there is less for the beneficiaries. But if it makes sense to use your life insurance to pay off high-cost loans, doing so can provide you with an opportunity to get cash now.

The best Ascent insurance companies for 2022

Life insurance is important if you have dependents. We’ve compiled the options and created a list of the best life insurance options. This guide will help you find the best life insurance company and the right policy for your needs. Read our free review today.