life insurance

Should I Borrow From Life Insurance Policy to Pay Off Debt?

Q: I was wondering if it is a smart idea to borrow from my life insurance (whole life policy) in order to pay off debt?

A: If it was just a matter of evaluating the wisdom of using your life insurance to pay off your charge card debt, I would be inclined to tell you that it would probably be a smart move.

However, there is a big wrinkle in the whole equation: namely, you stated that your job is ending soon.

Normally, I would have counseled you to seriously consider paying off the debt quickly while you can – especially since taking a loan from your whole life insurance policy should have no tax consequences to you.

However, the bigger issue is your looming unemployment status.

Use Insurance as a Cash Cushion in the Future

If you don’t find another job or a replacement contract, you will have to consider how you will pay all your normal monthly obligations – housing, food, utilities, transportation, and so forth. I assume you have little to no savings (or some of that likely would have paid the debt already).

Unfortunately, it is taking people longer than ever to find jobs. And with 10% unemployment, 1 out of 3 job-hunters has joined the ranks of the “long-term unemployed.” This means they have been out of work for at least six months.

So given the current economic environment, and the fact that your credit card debt is carrying an extremely low interest rate right now, I would suggest continuing to pay on that debt as aggressively as you can, but don’t yet tap the cash value of your whole life insurance policy.

Keep it untouched for now, as a standby cash cushion that you can access in the future if things get especially tight and you can’t easily replace your income.

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