Borrowing cash against your insurance policy to pay off credit cards is a double edged sword. It may be wise or it may end in disaster. How the situation turns out depends entirely upon your current financial standing, your financial needs and how you deal with them. One thing that is for sure is that this is a decision that needs to be made with ample research and requires a lot of thought to be put into it before it’s made.
Term or Permanent
When applying for a life insurance policy, you can either get term insurance or permanent insurance. Term insurance is usually cheaper since it only pays off in case of death. Permanent insurance on the other hand allows you to withdraw cash against your policy.
Cancel, Withdraw or Sell
When faced with high interest credit card bills, you may already be at the edge of reason. It is advisable not to borrow from your life insurance policy unless you’ve exhausted all other options. This scenario however is one of the few where you can do so.
Cancelling an insurance policy will allow you to withdraw all cash, minus any surrender charges, that has been invested into the policy so far and put an end to any future insurance payments.
Alternatively, you may sell your life insurance policy to an investor who will then profit from the settlement after your demise.
Borrowing against the policy will be your third option. The insurance company might let you borrow against the cash value of your insurance policy at a lower interest rate and allow you to pay it back according to your preference.
Borrowing against your insurance policy is a better idea than getting rid of your policy altogether since your beneficiaries or you will still stand to benefit from the settlement in case of debt or retirement. Additionally, the high interest rates associated with credit cards will no longer be draining your entire budget. Borrowing against the policy will replace this high interest rate with a much smaller one.
How to Obtain the Finance
In order to ascertain the amount of money that you can borrow from your life insurance company and how you can get it you will need to refer to the latest statement that you received. The ‘Net Cash Surrender Value’ is what you’re looking for. This is the cash value of the life insurance policy that you can borrow against or in other words; the amount of equity in the policy.
Once you’ve requested the funds from the insurance company, you will be required to fill out and return a form. This step can either be handled independently or with the assistance of a representative who will tell you the details and possible repercussions of this move.
Once the processing is complete, you will receive the cash to do with as you please or in this case, pay off your credit cards.
Having a debt free life is an extremely appealing idea but it isn’t something that can simply be jumped into. Make sure you discuss all aspects with the representative provided and understand the situation you are stepping into. Do the math and assess the pros and cons of the situation thoroughly.