A reader doesn’t have kids or dependents, but they do have too much debt.

3 minute read

I’m 42, in relatively good health with no spouse or dependents. My question is 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 can opt for additional if I desire. I guess it comes down to is it worth it to keep this policy when the monthly premium and cash value could be used/applied in better places.

—Peggy W. in Abilene, TX

Stephanie Guinan, insurance expert at ValuePenguin responds…

Hi, Peggy,

In some cases, tapping into a cash value life insurance policy could be a wise financial move. Yet despite the potential benefits, it’s wise that you’re asking questions before you give up your life insurance coverage to pay off debt. Below are a few more questions you should probably consider before you make your final decision.

What happens if you become sick, injured or have emergency expenses?

Whole life insurance doesn’t just cover expenses for a spouse or dependents when you pass away. The cash value of the policy might also provide financial resources you could depend on in the event of an illness, injury or another unexpected expense.

If you settle out your policy now, those funds would no longer be available — so you may want to be sure you have sufficient savings before you liquidate this asset.

Remember, you may be able to make a partial withdrawal against the cash value of your policy. And provided you don’t take out more than what you’ve paid the insurance provider in premiums, the withdrawal may be tax-free.

With a partial withdrawal, the insurer may reduce your death benefit by more than the cash value you take out of your whole life insurance policy. But if you’re not worried about providing coverage to anyone in the event of your death, it’s an option that might be worth considering.

Do you have joint debts?

While the number of one-person households is on the rise across the country, that doesn’t eliminate a need for life insurance. If you currently have outstanding joint debts, for example, it may be important to keep a sufficient life insurance policy in place to cover those obligations.

For example, if a parent, family member or another loved one cosigned a loan with you, that person could be left on the hook financially if you pass away without coverage prior to paying off the debt. On the other hand, if the debts you owe are in your name alone, then this probably isn’t a factor that should concern you.

Can you sell your policy for a settlement?

If you feel safe about cashing out your whole life coverage, there may be a better option available than surrendering the policy to your insurer for its net cash value. You might be able to sell your insurance policy to a third party in exchange for a life insurance cash settlement.

With a cash settlement, an investment company purchases your life insurance policy from you for more than its current cash value. However, the purchase price is less than the death benefit amount. The company assumes responsibility for your monthly premium payments and becomes the beneficiary and recipient of your death benefit when you pass away.

On a negative note, 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. Plus, there’s also no guarantee you’ll be able to find a company to offer you a settlement for your policy.

But before ultimately working with a company, you’ll want to make sure they’re licensed or registered to perform such transactions in your state. You can find contact information for your state’s insurance regulator on the National Association of Insurance Commissioner’s website.

Bottom line

Everyone’s situation is different, but locking in your rate when you were younger and presumably healthier is one of the major upsides to this type of policy; you’ll likely never again be able to secure a life insurance premium that low.

Aside from personal factors, premiums across the board are more expensive than they were in the past. According to insurance trade association LIMRA, whole life insurance premiums in the United States increased by a painful 25% in just the second quarter of 2021.

In addition, an employer-provided life insurance policy may end if you leave your job. The type of life insurance will determine if the coverage is portable — but if it’s not, cashing out may be a smart option.

These risks don’t mean that settling out the cash value of your whole life insurance is wrong. But you should take an honest look at all of the potential cons before deciding to close out your policy to wipe out debt.

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About the Author

Stephanie Guinan

Stephanie Guinan

Stephanie Guinan is a senior writer at ValuePenguin specializing in insurance. She has had previous roles as a content marketing writer and an award-winning data journalist. Her work has been cited by WSJ, NYT, Forbes, and more.

Published by Debt.com, LLC