One of the benefits of life insurance is leaving your loved ones a supply of cash to pay for final expenses and any debts you leave behind. At the same time, it's a great idea to reduce the amount of debt they have to deal with. Not only does this make your life insurance death benefit go further, but it also reduces the overall cost of your debt. When you cut down your amount of debt, you also cut down the amount of interest you're paying on that debt, which is why it's referred to as "reducing the cost" of your debt.
As you work on paying down your debt, it’s a good idea to consider protecting your family against that debt with life insurance. If you insure yourself, your family will have the money to pay off your debt should anything happen to you. You might want to add up the current total amount of your debt, and then seek out a policy that includes that amount plus enough to pay for funeral and burial expenses. That way, you know your family is protected no matter what. Check out the video below, which tells the story of a single mom who found a way to buy life insurance, even on a tight budget.
Here are a few debt-reduction strategies:
- Refinancing. If you're making payments on a high-interest consumer loan, such as a mortgage or auto loan, and interest rates have come down since you originally borrowed the money, refinancing may be a good idea. If you refinance to a lower interest rate, your monthly payment will likely be lower. Other options include extending your loan term to lower your payments.
- Consolidation. Debt consolidation basically means rolling multiple small individual loans into one larger loan. This allows you to make only one monthly payment instead of many. You can roll them into one low-interest credit card, take out a personal loan to pay off your debts, or use a home equity loan. You'll only have one monthly payment, and that payment should be less than the sum of the payments on your individual loans. Plus, the interest rate on your consolidation loan should be lower than the average of the rates on those individual loans. This lowers your monthly payment and saves you money over time.Be careful that the term of your consolidation loan isn't longer than the terms of the original loans. If it is, you may end up paying more interest in the long run, even if the rate is lower. In that case, you may not actually be saving any money, even though your monthly payments are less.
- Reducing credit card debt. The best way to deal with credit card debt is to pay it off in full each month. However, that's not always possible. There are some other things you can do to help lower the cost of your credit cards. Comparing credit card finance charges, fees, and benefits may help you minimize your interest rate and annual fees. And of course, paying off outstanding balances reduces not only the interest you pay each month but the total interest you pay over the long term.
- Using other assets to pay down debt. You can also choose to withdraw funds from other investment vehicles in order to pay down your debt. For example, you might tap a vacation savings account—or you might sell off some of your current assets, such as stocks, bonds, jewelry, or fine art. For example, if you have stocks that have experienced losses and you no longer want them in your portfolio, selling them and using the proceeds to reduce your debt burden could in effect help offset some of the cost of your investment loss. Assets that are no longer needed, or that have lost any special meaning, can be sold for cash, and the proceeds used to pay down debt. .
No matter which debt reduction method you select, life insurance is an excellent choice in terms of protecting your family from having to pay the debt that's left over.