Can my life insurance help to pay off my debt?

Q. I have a whole life policy with a $500,000 death benefit and cash value of about $100,000. I want to get rid of $30,000 in credit card debt, $20,000 in student loans and a $50,000 home equity line of credit balance. Should I borrow or take out the cash value to pay it all off, especially with rising interest rates? Are there tax consequences?

— Debtor

A. Yes, those rising interest rates are painful.

We’re sorry to hear you have so much debt, but it’s great that you’re looking at strategies to pay it off.

Before deciding on using your life insurance policy’s life-insurance-policys-cash-value/”cash values, you need to compare the interest rates on your outstanding debt and the interest you would pay for a loan on your policy, said Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock.

He said you should compare the rates to see if it makes sense to borrow against the life policy, noting it could make sense for some but not all of your current loans. .

“And to clarify, you are not borrowing from your whole life policy,” he said. “You are using the cash values ​​in your whole life policy to borrow from the Insurance company. They use your policy values ​​as collateral. That’s why there’s a loan interest charge.”

The repayment for a life loan is very flexible so it may be a benefit to some, but it could also be a detriment to others that may not be as diligent with repayment, he said.

There is no tax consequence to borrow money against your life policy, Gaelick said, But if you surrender your policy, there would be income tax on any amount above your “cost basis” or how much premium

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