Debts can be a serious issue and one must take required steps to resolve it before it becomes overwhelming. Debt management can be looked upon as a remedy for debt problems. However, while considering settlement you must remember that you may need to come up with a lump sum fund to repay the debt upon the lender’s demand.
Now, if you had money you wouldn’t have been in a debt situation to begin with. Hence, it becomes a concern for many to come up with the money while negotiating a settlement. Life insurance policies, typically the whole life policies, play a crucial role in such situations.
Cash value is a typical feature of whole life plans and can be used as a resource for funds at the time of emergency. Cash value is the amount over and above the life coverage that gets generated from the premium paid on the policy.
Most of the whole life policies allow the policyholders to withdraw the accumulated cash value on the policy partially or fully after a certain period of time, which is normally after three years. This money then can be used towards debt settlement if required.
Advantages of using life insurance for debt management
Following are the advantages of borrowing from your policy.
- Anytime accessibility: Cash value is available to you anytime. You may need to contact your insurer/agent and request a withdrawal. This money is normally available within a short notice.
- No obligation to repay: Since you are taking the money from your policy, you don’t have the obligation to repay. Thus you can save yourself from getting into further debt. However, the amount along with interest would get deducted from the death benefit at the time of final settlement.
- You are charged lower rate of interest: The interest charged by the insurer is less than bank rates.
- Tax benefits: When you borrow against your policy, it’s considered as debt and hence non taxable.
Anyway, there are disadvantages too in using life insurance for debt settlement. But, those are relatively fewer in number than its advantages.
