Should I cancel my life insurance policy and use it to pay off most or all of my consumer debt?
posted by anonymous to Work & Money (8 answers total)
I'm Canadian, 50 years old, single, self-employed, with no dependents. I have about $15,000 in consumer debt and about $200,000 owing on my house. I'm covering my mortgage payments well, and am currently spending about $300/month on servicing the credit card debt. (I have 3% interest until October, but it goes up to 9% after that). There's a good chance that things will be busier for me in the spring, and I may be able to increase my debt repayment to about $1200/month, but I can't count on that.
My retirement savings are lower than I would like them to be, but I do have house equity, several RSPs, and two life insurance policies. One policy will pay out $250,000, which will cover the house and any outstanding debts. This policy costs $25/month and has no cash value. The other whole life policy would only pay out $100,000 but can be cashed in when needed. I'm paying just over $100/month for the latter policy, and it is projected to be worth $40,000 when I'm 60, $55,000 when I'm 65, and $120,000 if I make it to 80.
To my understanding, there are three reasons to have life insurance: to cover debts when you die (my major debt is the mortgage, which is fully covered by the $250,000 policy); to provide for dependents (again, I have none); and to act as an investment vehicle (I have other investments I'd like to improve).
This whole life policy's current cash value is just under $15,000. If I cash it in and apply most or all of this to my debt, it would allow me to put a lot more money towards my other retirement investments every month ($400-$1300, counting the insurance premiums and current/projected debt payments), and give me some peace of mind and breathing space. I have been watching my budget and have been paying down my debt as much as possible, but it's been a horrible year on a number of levels and I'm actually deeper in debt than when I started. Optimistically, I'm about 18 months away from clearing the consumer debt. Pessimistically, it could be another 5 years before it's clear. If I cash in the life insurance, I could be free of debt significantly faster.
The possible drawbacks of cancelling the whole life insurance:
1) The tax hit of about $3000-$4000 on the $15,000 I get from the policy. This would mean paying only $11,000-$12,000 to debt immediately, which is still a huge improvement, or paying it all off and budgeting carefully for the rest of the year to cover the expected taxes.
2) The loss of potentially $40-55,000 (taxable income) at retirement age. I could almost certainly make this up or exceed this with other investments once my debt is gone.
3) At 50, if I do need to buy a new life insurance policy for any reason, it could be much harder to get and more expensive. But I can get $10,000 of coverage for $20/month from the same company that provides my supplemental medical insurance. I don't need lavish life insurance, just something to cover any remaining small debts and a funeral. I do need to be out of debt as soon as possible and to have a much larger retirement fund.
Given these issues, is it worth cashing in the policy? I think it is, but I could be missing something important. If necessary, you can contact me at email@example.com.