How to Use Life Insurance to Pay Off Debt

Last updated on March 30, 2021 by Eric Rosenberg in Life Settlements, Retirement Planning

Family walking on the beach after paying off debt with life insurance.

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Paying off debt is easier said than done, but it may be easier than you realize. If you have a life insurance policy that you no longer need for any reason, you may be able to sell your life insurance for a lump sum cash payment. The average American household is struggling with credit card debt, student loans, a home mortgage, and other expensive monthly payments. Imagine paying that off for good.

With a life insurance settlement, you may be able to get a cash payment for your life insurance today and stop making monthly payments. There are some important considerations before moving forward, but if you can do without the life insurance policy, it may be a great way to pay off debt, an opportunity to make money, rather than considering life insurance cancellation which would not benefit you in the same way.

Can a Life Insurance Policy Be Used to Pay Off Debt?

Depending on the life insurance coverage you have, you may have an option to use your life policy to pay off your debt. You shouldn’t rush and get rid of life insurance if your loved ones still need that death benefit, should anything happen to you. But if you have enough savings to go without life insurance, selling your term life insurance or permanent life insurance could be a smart move.

With term life insurance, cashing in on your policy to pay off debt is a straightforward process. As long as the monthly premium is paid, the insurance company will keep the policy going and pay out a death benefit to the listed beneficiary. When you sell term life insurance, an investor pays you a lump sum today and takes over the premium payments and gets any future death benefit if the insured passes away.

Once you get your cash, you can use it any way you choose. That can be for retirement savings, a debt payoff, medical bills, or long-term care costs. There is no limit to how you use the cash.

The big downside, of course, is that your loved ones would lose any future benefits from life insurance. If they would rely on those funds in a worst case scenario, you may want to hold onto that life insurance and find another way to pay off debt.

If you have whole life insurance, also called permanent life insurance, you may have additional options to pay off debt. You can take a loan or withdraw from the investment portion of your policy to pay off debt. Just consult with a tax expert on any potential income tax implications of tapping into whole life insurance to pay off debt.

What Kind of Debt Can Get Paid Off?

It doesn’t matter what kind of debt you have, you can pay it off with proceeds from selling your life insurance. When paying off any debt, the best strategy is to focus on the highest interest debt first, and then work on lower interest debt.

High-interest debt generally includes things like credit card debt, personal loan debt, and the worst offender: payday loans. These unsecured debts regularly charge interest rates over 20%. As these cost you the most per dollar, you should focus any free cash you have to this type of debt.

Next, focus on lower interest debt. This includes student loans, but could also include an auto loan. Remember that if you have a co-signer, the debt affects their credit score too. Getting rid of the debt saves you money on interest and can help your credit score.

The life insurance company doesn’t care if you sell your life insurance. They certainly don’t care if you use the life insurance money to pay off debt. While you probably shouldn’t sell a term life insurance policy or permanent insurance over something like a single car loan, it can make sense if you have a ton of high-interest debt and struggle with payments.

use life insurance to pay off debt

What are the Pros, Cons and Alternatives?

The biggest benefit of selling your life insurance to pay off debt is the money (and stress) saved from getting out of debt. Debt can put a serious damper on your lifestyle, and regular calls from credit card companies and collections agents are enough to push even the most level headed people over the edge.

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However, there are some downsides of selling your life insurance to pay off debt. After you work with a life settlement company, your loved ones lose any future death benefit. If you don’t have significant retirement savings, that could leave them in a very difficult situation if your income were to suddenly stop.

Insurance policies also typically go up in price with age and health problems. A new term life policy probably costs more than your old one, so don’t give up those life insurance benefits until you’ve discussed it with your family and understand your life insurance rates to get the same coverage amount in a new life insurance policy.

If you’re looking for alternatives to help you get out of debt, consider a home equity loan, if you have enough equity built up in your home. This can help you pay off your credit cards at a low interest rate. However, it might increase your bills. Depending on the loan, it may work like a second mortgage payment.

As another alternative, if you only have credit card debt, you could use a balance transfer card as a debt consolidation and payoff tool. Many cards offer a 0% APR introductory period. That can help you save on interest and get ahead of the debt so you can pay it off for good.

How People Can Sell Their Policy to Pay Their Debt

A debt payoff is a big deal. If you’ve weighed the pros and cons and decided that you do want to sell your life insurance to pay off debt, you have some good options.

Working with a quality, trusted life insurance settlement company, you can sell your life insurance and get the best possible deal. In some cases, you can sell a portion of your policy rather than the whole thing. If you are over-insured but still want some life insurance, this is a great win-win solution.

Once you get your payment, you can pay off your credit cards, student loans, mortgage loans, or anything else. If want to sell your life insurance, contact Mason Finance today to learn more.

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Eric Rosenberg
Eric Rosenberg is a personal finance expert residing in Southern California. He holds a BSBA in finance from the University of Colorado and an MBA in finance from the University of Denver. He has over a decade of experience writing about financial topics online. His work has been featured on Business Insider, Investopedia, The Balance, Investor Junkie, and a wide range of quality financial publications.

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