Get Out of Debt Guy

Should I Cash Out My Life Insurance to Pay My Debts?

Posted March 19, 2013

WRAL Reader Question

I am a single male with no dependents, making 100,000 a year.

I have the following debts: 135,000 in mortgage, 45,000 on home equity line, which was used to make improvements. House value is approximately $210,000.

I have a 401K loan with about 32,000 owed on it. I have a loan against whole life insurance of $18,000.

I have a car loan of $16,000. Currently after everything is paid, I have about $700 a month in spending money. This is with contributing approximately $8000 a year towards retirement.

I am with a company that has a guaranteed pension plan.

In my 401 K retirement accts. I have approximately 350,000. This includes deducting the amount owed on the loan.

1. I have recently stopped paying on the whole life loans. The cash value remaining on the whole life policies is approximately $22,000. Should I cash that in and apply it to other debt.

2. Should I consider taking money out of one of my retirement account that is loan free to pay off other debt? Only one 401k has a loan.

Thanks.

Ellis

Answer

Ellis,

A common misperception is that the 401k money is a cheap place to borrow. But what people often fail to take into consideration is the lost return they miss on the borrowed money.

Let's say you borrow the money at 5% but the stock market goes up and your investments rise 10%. That loan actually cost you 15%, not 5%.

Life insurance is beneficial to helping the family that remains to deal with the lost income and burial expenses. Since you have no family at this time, do you see yourself having a spouse or children in the future?

But what concerns me more is if things are going so well, why did you have to borrow from the 401k and life insurance accounts to begin with?

And what is the plan now for when you pass away? Just let the courts deal with it?

I think if we can deal with those issues it will give us some clarity on what to do about the loan.

Please post your responses in the comments section below.

Steve Rhode

WRAL Get Out of Debt Guy

If you have a question you'd like to ask me, click here to ask your get out of debt question.

8 Comments

Please with your WRAL.com account to comment on this story. You also will need a Facebook account to comment.

Oldest First
View all
  • Lovestosave Mar 21, 2013

    I would agree. Sell the car and and get somethng more affordable. Refinance the house and roll-in the home equity line at a great rate. Then cash in the life insurance and pay off any other debt. I would also recommend an emergency fund for 3-6 worth of expenses.

  • ncveteranswife Mar 20, 2013

    He needs to sell his car and buy something with some of the cash. Put a $1000 in an emergency fund and put the rest of the cash from the sale of the car on the equity line and don't take on anymore debt.

  • hardycitrus Mar 20, 2013

    Well what's your interest rate on the mortgage? This is a good time to lock in a low rate if you haven't already.

  • steverhode Mar 20, 2013

    Thanks for the reply.

    I can't tell you what to do. That needs to be a decision you come up with after considering your options.

    But considering the fact you've already made allowances for your end of life and burial expenses, I'm assuming that's addressed in the will, then cashing out the whole life policy to pay down you other obligations is a reasonable solution with the understanding that you are terminating a life insurance policy. But you sound like you are well aware of what you are doing.

  • noblelesliedevotie Mar 20, 2013

    Ah, divorce. The single biggest hit one can take to his net worth.

  • steverhode Mar 20, 2013

    I'm with you but that's why I asked him what his future intentions were.

  • Lovestosave Mar 20, 2013

    He say he has no dependents. Also, I think getting out of debt should be a priority, but it may depend on his age.

  • noblelesliedevotie Mar 20, 2013

    He's a single male. Can we assume he has no dependents? If so, why does he need life insurance at all?

About this Blog:

Steve Rhode has had careers in opthalmology, real estate and as the head of a nonprofit debt counseling firm. On his blog, he offers hard-won, free advice about getting out of debt, consolidation and making the right choices as you manage your money.