We all are aware of how the current COVID-19 pandemic has disturbed the economy and financial well being to the point that it pushed the consumer debt to $14.3 trillion in the first quarter of 2020. Around 120 million US citizens are in credit card debt, and approximately 40% of them don’t have money to make the minimum monthly payments. Almost 23% of them have incurred more credit card debts in the first 3 months of 2020. This also happens to be the time when the pandemic brought the whole world under its control.
The financial health of the consumers is frail with massive job loss and pay cuts. No one knows when consumers will recover from health and financial problems. People need cash in their hands for covering their basic expenses and getting rid of debt problems.
Credit card companies have announced a lot of debt relief measures, which includes forbearance. It allows consumers to skip payments for a few months. But this doesn’t mean that consumers can skip payments forever. They have to pay off the entire balance later. It’s just a short-term solution.
So, what is the long-term solution? How can consumers get out of credit card debts? One effective solution is using a life insurance policy to clear debts.
How to use a life insurance policy to eliminate debts
A life insurance policy can be used to eradicate debts fast. Here’s how you can use it to lower your debt burden.
1. Sell your life insurance policy
Do you have a term life insurance policy? Do you have adequate coverage? Are all your premiums up-to-date? If so, then your insurer has continued your life insurance policy until now. You can sell your term life insurance and get a lump sum payment from the investor. The investor will be the new owner of the term life insurance policy. His beneficiary will enjoy the death benefits henceforth.
Once you get the lump sum payment, you can use the amount to get rid of your debt problems. You can use the money to repay your credit card bills and get some peace in your financial life.
If the coverage amount is more than what is required, then you can sell a portion of the life insurance policy. This way you’ll enjoy dual benefits. You will get some money to clear your debts and won’t lose out on the entire policy as well.
2. Take out a loan against your policy
Do you have a whole life insurance policy? If so, then you can borrow money from it and pay back your creditors. You don’t need to sell the policy. All you need to do is take out a loan against the investment portion of your life insurance policy. Once you receive the loan, you can use it to pay off your existing debts.
There are a few benefits of borrowing a loan against your whole life insurance policy. First, there is no credit check. Second, there is no application fee. Third, you will get enough time to pay yourself back. You can do so when your financial situation becomes somewhat stable.
The loan amount depends on the cash value of the policy. You can find out the cash value from the annual statement of your policy. Otherwise, you can call your insurance agent or the customer care representative to know about the value. Give your insurance policy number to get all the details.
Once you get the loan, you can use the money as per your wish. The insurance company won’t be bothered about it. You have to pay only the annual interest on the loan. There is no hard and fast rule that you have to pay back the principal amount too. However, there is one fact that you should be aware of.
If you don’t pay off the principal amount, then that portion will be deducted from the policy’s death benefit. That’s all. Missed payments won’t hurt your credit score.
Types of debts can you pay off with a life insurance policy
You can pay off any type of debt with the money received from selling your life insurance policy. You can use the money to pay your credit card bills, medical bills, student loans, payday loans, utility bills, auto loans, personal loans, and so on. But it’s advisable to pay off high-interest debts first with the money. Once those debts are paid off, you can use the remaining amount to clear your low-interest debts.
Even if you take out a loan against your whole life insurance policy, the annual interest rate is lower than the credit cards and payday loans. The annual interest rate on a life insurance policy can be as low as 4%. So, you save a significant amount here.
Should you sell your life insurance policy?
Pandemic has made our life uncertain. So, you shouldn’t consider selling your life insurance policy as the first option to pay off debts. God forbid, if you too become a victim of Covid-19, then your beneficiary will get the death benefit. Your loved ones will get money to survive without you. However, if you have sufficient funds in your bank accounts, then you can sell your life insurance policy to get rid of your debt problems.
Don’t try to sell your life insurance policy without having a prior discussion with your family. Also, various factors should be considered before selling policy. For instance, your retirement savings. Unless you have saved a significant amount in your retirement savings account, you shouldn’t sell your policy. Consult with a tax account too to know if there are any tax consequences.
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