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Ask the Life Insurance Expert
I'm deep in debt. Should I cash in my life insurance policy to pay off my credit cards?
First, does your insurance policy have cash value? Term life insurance, which insures you for a certain period, such as 10, 15 or 20 years, pays a death benefit to your beneficiaries if you die within the term. Otherwise, it has no cash value.
Only permanent insurance--such as whole life, variable and universal life--has a cash account that accumulates over time.
The cash value is not the same as the death benefit paid to beneficiaries. However, withdrawing cash can reduce or eliminate the death benefit. You can borrow against the cash value, and, as long as you pay back the loan with interest, still maintain the death benefit. Or you can surrender the policy for the cash. You may pay a surrender fee.
The cash value is a strong selling point for permanent life insurance. However, know the consequences before tapping into the policy. The question of whether you should use life insurance to pay off debt draws mixed reactions from financial experts. It might make sense to take out a loan against the policy--which usually has an ultra-low interest rate--to pay off credit cards with double-digit interest rates if you have no other financial means and are in a real jam.
Make sure you repay the loan from the policy, though, or the death benefit will be reduced and your heirs may not have the financial protection they need.
Some experts advise against taking money out of the policy if you've been sued or have judgments against you. Life insurance generally is protected from creditors, but creditors could seize the money if you take cash out of the policy.
Consider the loved ones you want to protect with life insurance before you take any action.