Ways to Pay Off Life Insurance Debt
July 14th, 2011 | Author: weissheiss
Basically, life insurance debt means borrowing funds that come from your policy. The debt arises from taking out or borrowing funds from your insurance policy. In this manner, insurance debt is simply a normal component of permanent life insurance coverage. Depending on how the money was withdrawn, the debt can be voluntarily or involuntarily created.
The way you can pay for your insurance debt depends on if it comes with interest. Additionally, it depends on how the debt was made, and the terms of borrowing outlined by your life insurance policy’s contract.
You will be borrowing money from yourself, and chances are you will not be paying interest, so no extra money will come out of pocket. The following are some non-forfeiture options based on current insurance policies that you can choose from to repay your insurance debt: reduced paid up life insurance non-forfeiture. Your insurance policy’s residual cash value can be used to pay off the dept with this option. If you choose to pursue this option, the coverage in your insurance policy will change as well. Your insurance provider will take away the borrowed amount, and then apply interest rates (most likely there are very low), and take away any other fees from your cash value to calculate your residual cash value. If paying off your debt is more important to you than life coverage, it may make sense to reduce your paid-up life insurance.
Termination of Policy. If you have permanent life insurance, it doesn’t necessarily mean you have to pay off your insurance debt. The insurance company has the option of reclaiming the amount of your coverage instead. This is why insurance providers generally only allow you to take out so much money from the total value of the insurance policy that you are holding. This choice is probably going to be your last resort, when you find yourself in a situation where having no life insurance actually leaves you in a better state financially.
Lump-Sum Disbursements of Funds. Because interest is frequently assessed for insurance loan coverage (common on permanent life insurance programs), in almost all cases, it’s best to pay off your insurance debt as soon as possible! If you don’t want your policy to change, you can make a lump sum payment for the balance owed instead of making payments month after month.
If you miss a few premium payments, you may end up in insurance debt. Fortunately, you can obtain something called an “automatic premium loan” – this is designed to offer you security from devastating situations, because it promises to keep your permanent life insurance active. The downside to automatic premium loans is that if you miss your premiums or interested payments you will be charged on your cash value. Go for a non-forfeiture option, if this would happen.
What is great about insurance debt is that, unlike other types of debt, you can pay it off when you decide to and only if you need to. Just keep in mind that you are borrowing from your own capital.
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