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Should I Cash Out My Whole Life Insurance Policy to Pay Off Debt?



I’m 42 years old and in relatively good health. I have no spouse or dependents. Would it be wise to take the cash value of my whole life insurance policy to pay off some credit card debt?

I have a small life insurance policy through my job, and I can opt for additional coverage if I desire. I guess it comes down to this: Is it worth it to keep this policy when the monthly premium and cash value could be used in better places?

Peggy W. in Abilene, TX

Vicki Gunvalson, Coto Insurance founder, responds…

In my three decades as a licensed insurance agent, I’ve heard a version of this question literally hundreds of times. People always want to know if they can use their life insurance policy while they’re still alive.

Peggy, you’ve already answered the first question I always ask someone contemplating this: If you cash out your whole life insurance policy, is your family protected by any other life insurance? Since no one else is relying on that policy, you’ve cleared the first hurdle.

Next question: Have you considered a “partial withdrawal”?

Depending on the policy, you might be allowed to take some cash from your policy without taking all of it. There are a couple advantages to this. First, you still have the policy! Sure, your provider will probably reduce the death benefit – maybe by more than you withdrew – but at least it would still exist.

Even better, if you withdraw less than you paid into the policy, you might not have to pay taxes on it. If you withdraw more than you paid in, you probably will.

Last question: Do you have any other funds you can tap in an emergency?

Whole life insurance doesn’t just cover the expenses when a spouse or a dependent dies. The policy’s cash value can help you pay for illnesses and injuries that aren’t fatal at all. But if you cash out that policy to pay off your credit cards, you might not have enough for those emergencies – which likely means you’d run up your credit cards again!

If you do cash out your policy and pay off your credit cards, you should channel your savings into an emergency fund.

Another option: Have you considered selling your policy?

My friend Stephanie Guinan is an insurance expert at ValuePenguin. She says you might get more money by selling your policy than cashing it out.

“With a cash settlement, an investment company purchases your life insurance policy from you for more than its current cash value,” Stephanie says. “The company assumes responsibility for your monthly premium payments and becomes the beneficiary and recipient of your death benefit when you pass away.”

There are two drawbacks. First, the purchase price is less than the death benefit amount. But that probably doesn’t matter to someone in Peggy’s situation.

Second, there are tax consequences to this arrangement.

“You may have to pay both income taxes and capital gains taxes on the funds you receive from the investor,” Stephanie says. “Plus, there’s also no guarantee you’ll be able to find a company to offer you a settlement for your policy.”

Bottom line: This is an idea worth pursuing, but not without expert help.

Credit card interest rates are costing Americans up to 20 percent and more. That means you’re handing over $1 a month to your credit card company just for the privilege of charging $45. So getting rid of that debt is crucial.

But insurance can be tricky and complicated. Just for the ideas we’ve discussed above, there are factors I didn’t even mention: 7702 life insurance, paid-up additions, and variable and universal life insurance policies.

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