Should You Tap Your Life Insurance to Pay Off Debt?

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

Some life insurance policies accumulate a cash value you can access. But read on to see if tapping yours to pay off debt is a smart choice. 

As of the end of 2022, U.S. consumers, collectively, owed a total of $930 billion in credit card debt, according to TransUnion. Your share of that total may be somewhere in the ballpark of $2,000, which may be a manageable sum to pay off in time.

But what if you’re $30,000, $40,000, or $50,000 in debt, and you don’t see a way to break that cycle? If you don’t have savings to tap, you may be inclined to tap your life insurance instead. But whether that’s a good idea is questionable.

Your life insurance shouldn’t double as your bank account

Term life insurance policies do not accumulate a cash value over time. But whole life insurance policies do. And if you have the latter, and your policy has accrued a cash value, then you can generally borrow against that balance or even cash it out partially or in full.

You may be inclined to take out a chunk of your life insurance if you’re overloaded on debt and feel there’s no other way out. But before you do, try to remember why you bought life insurance in the first place.

You no doubt bought that policy to protect your loved ones from financial stress in the event of your passing. But if you raid your life insurance policy to cover your debt, you’ll leave the people you care about the most with that much less money upon your passing.

So, let’s say you have a $50,000 debt hanging over your head, and you have a $250,000 life insurance policy with enough of a cash value to give you access to the money you need to pay off your debt in full. If you take the money, you’ll slash the benefit your loved ones would be in line for by 20%. That could make a big difference.

A better way to cope with debt

Tempting as it may be to tap your life insurance to pay off debt, there may be a better way — one that allows you to keep that financial protection in place for your loved ones while also breaking the cycle you’ve landed in. First, you could attempt to negotiate your debt down to a smaller number. You could also do a serious spending overhaul and make changes that have you shelling out a lot less money each month on bills. That could, in time, allow you to get your debt paid off.

Being in debt can be very stressful, not to mention costly. But before you take money out of your life insurance policy to get rid of your debt, think about the impact that might have on the people you love.

It could pay to talk to a debt settlement firm if your debt is immense and you feel you need help getting out of that hole. A financial advisor might also be able to help you whittle down your debt in a cost-effective manner, all the while leaving your life insurance untapped.

Our picks for best life insurance companies

Life insurance is essential if you have people depending on you. We’ve combed through the options and developed a best-in-class list for life insurance coverage. This guide will help you find the best life insurance companies and the right type of policy for your needs. Read our free review today.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More