Life Insurance Blog

Can you use your life insurance to pay off your debt
February 25th, 2011
in affordable life insurance

Though you can use your life insurance to pay off your debts, it is better to avoid using up your affordable life insurance in making the debt payments. You should first try other debt pay off or reduction methods to become free of your debts like the simple debt management plan, debt settlement or debt consolidation. However, the life insurance policy is generally used to pay off the debts of a person after his death. There are mainly three ways in which you can use your life insurance to pay off the debts.

Ways to pay off debt through life insurance

A life insurance policy can help you to pay off the unpaid debts through three main ways and these are:

1. Withdrawing money from your life insurance policy – You can use the cash from your life insurance to pay off your debts. However, you will have to use your cash value insurance policy to pay off your debts rather than using the term life insurance. In cash value insurance, the cash value grows year after year with the tax-deferred interest. Once you have been able to accumulate good cash value, you can use the amount to pay off your debts. However, while doing so, you will have to go on making the monthly premiums on the insurance in order to maintain your policy.

2. Borrowing from your life insurance account – other than withdrawing money from your life insurance, you can borrow from the policy to pay off your debts. Here borrowing is same as any other kind of borrowings. That is you can take out a loan against the built up cash value of your insurance policy. Thus, you will have to pay back the amount that you are going to borrow against your policy, otherwise the value of your policy can get reduced. However, in case the policyholder dies before paying back the amount he had borrowed, the balance is then deducted from the policy and then the remaining balance is handed over to the beneficiary(s) of the policy.

3. You can also consider life settlement option – Another way in which you can use your life insurance to pay off your debts is through life settlement. This can be your option if you either transfer or sell off the policy to a third party in lieu of a certain amount of money. If you do so, you as a policyholder may be able to get an amount more than that of the cash surrender value of your insurance policy. But, the fact is that this amount which you will receive will be less than the amount which you would have received as death benefit.

Another thing that you should know about life settlement is that the person who buys the policy becomes the policyholder. As a result, he will have to be responsible for making the premium payments. Other than this, you won’t be able to opt for life settlement unless you are a senior citizen (more than 65 years of age). The life settlement proceeds are also taxable.

Jason Holmes is a regular writer with Debt Consolidation Care and is also a contributory writer with other financial sites. His expertise is woven around various aspects of the debt industry and with his e-books he tries to impart to people the different situations and simple solutions to get out of difficult situations. Some of his works include e-books like ‘Credit Score The Quintessential Therapy for a Happy Pocket’, Take Creditors and Collection Agencies to Small Claims Court’ and, My Story- From Depression To a Smile’.

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