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.
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.
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