Debt Relief Help - Using Retirement and Insurance To Get Out of Debt
Life Insurance
For those of you who have life insurance with a cash value (known as whole or universal), you can borrow against the amount of cash in the policy and use it to pay off your debts. Cash value life insurance is a great antitode to debt for two reasons: firstly, there is no need for an application or credit history check; and secondly, there is no need to pay the money back.
Say what? Borrow money from myself to pay off debts and never pay it back? What do I look like, the federal government? Well, that's how it works, though when you die, the inusrance company substracts your outstanding balance from the death benefit paid to your beneficiaries. So if you have a million dollar policy and borrowed a million dollar from it, your family/friends/institutuion receives nothing when you die.
Some people may feel uncomfortable slighting their loved ones like that, which is understandable. However, this is an easy way to pay off your debts without working your way into someone else's pocket. Before you borrow from your policy, take the time to read through the fine print to get a clear idea on the terms, conditions and fees associated with it. If you still aren't sure, contact your insurance agent/ securities broker and ask them.
There are several ways to you can pay off your debts, such as borrowing from your retirement account, taking a line of credit from your equity, applying for a debt consolidation loan, or even <gasp!> spending less money than have in the past. Borrowing from a cash value life insurance policy may make the most sense for you and your family.
Use Retirement Plans To Pay Down Debt
Many employees have 401(k) or 403(b) plans through their employers, which allows their pre-tax dollars to remain invested - and hopefully growing- tax free until they withdraw it. For the most part, employers allow plan participants to borrow the money in their retirement account. At the time of writing, employees could borrow a maximum of $50,000 or 50% of the account, which ever is less.
Like borrowing from a cash value life insurance policy, you are in effect borrowing from yourself, and requires no application or credit history check. Unlike an insurance policy loan, you are required to pay the loan back within five years, and you will be charged interest. If you don't pay the full balance back within the specified time frame (usually five years) you face some serious consequences. You will have to pay a 10% penalty on the unpaid balance, and pay income tax at tax time.
If you are disciplined enough to repay the loan, this may be the best option for you. However, for many people who find themselves deep in debt, borrowing from your retirement can be risky. There isn't anyone to pay but yourself, and if unexpected rainy days occur, your own retirement may be at risk.
Some employers charge a hefty fee for applying, some of which exceed $300. Consider whether the loan would be worth it with that fee added into it. Another concern is if you leave your job or are laid off before the loan is paid back your employer has the right to demand you pay the balance in one lump sum. If you fail to pay them within one to three months, the federal governement will tax it as income and levy the 10% penalty fee.
The bottom line is this: if you see yourself working for the same employer for the next ten years, and are dedicated enough to pay the loan off as scheduled, consider using your retirement account to pay off your exisiting debts. If your answer to either of those situations is no, then consider pausing your retirement contributions while you pay down your debts, or investigate a debt consolidation loan.
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