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Using Life Insurance to Pay Off Medical Debt

Medical debt can be overwhelming. Hospital bills, doctor bills, prescriptions – it all adds up so fast. And even with insurance, copays and deductibles take a huge chunk out of your pocket. What if you could use money you already have to pay it off? Your life insurance policy could be the answer.

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Life insurance pays out a lump sum when you pass away. Your family uses this money however they need – to cover funeral costs, pay off the mortgage, etc. But did you know you can also use your life insurance benefits while you’re still alive?

Withdraw Your Premiums

The premiums you’ve paid into your life insurance policy belong to you. You can withdraw this money tax-free and use it to pay medical bills[1]. Whatever you take out lowers the death benefit, but it could give you tens of thousands in cash to put toward medical debt.

Take Out a Policy Loan

Most permanent life insurance policies allow you to borrow against their value. This works kind of like a home equity loan. You can borrow up to a certain percentage of your policy’s value, using the future death benefit as collateral. The loan could give you a nice chunk of change to knock out medical bills. You’ll have to pay interest, but it’s relatively low – often less than 5%[2].

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Sell Your Policy

In a life settlement, you sell your policy to a third party for cash. This turns your policy into money you can use now for medical bills or anything else[3]. The buyer takes over paying premiums and collects the payout when you pass. Life settlements often get you 30-60% of your policy’s value. So a $500,000 policy could net $150,000-$300,000 cash.

Things to Consider

Using your life insurance to pay medical debt can be smart. But there are some key factors to weigh:

  • Your loved ones will get a smaller payout – Make sure they’ll still have enough to cover expenses
  • Permanent policies work best – Term life insurance has no cash value
  • You may owe taxes – Loans and withdrawals could be taxable income
  • Fees can eat into proceeds – Settlement companies and lenders take a cut
  • It could affect eligibility for public assistance – Taking cash could impact Medicaid, etc

The Right Kind of Policy

To tap into your life insurance, you need permanent insurance – whole, universal, or variable life. These policies build cash value you can access. Term life insurance only pays if you die during the term and has no cash options[4].

Whole and universal life tend to work best for medical debt. They have level premiums, guaranteed growth, and predictable cash values. Variable life invests in the market, so cash value fluctuates. This makes borrowing and settlements riskier.

How to Access Your Cash

Here are your options for turning life insurance into medical bill money:

Withdraw Premiums

Most permanent policies allow you to withdraw some or all premiums paid. This comes directly out of the policy’s cash value. It lowers the death benefit but provides cash to pay medical bills now. Withdrawals are tax-free up to what you’ve paid in premiums.

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Policy Loan

You can borrow up to 90-95% of a whole or universal life policy’s cash value. This is called a policy loan. It’s secured by the death benefit, so it’s not really debt. You pay a modest interest rate – often less than 5%. Loans reduce cash value and death benefit unless repaid.

Life Settlement

In a life settlement, you sell your policy for a lump sum, usually 30-60% of the death benefit. The buyer takes over premiums and gets the payout when you pass. Settlements permanently end your policy, but provide cash now. The proceeds are tax-free if you’re terminally ill.

What Medical Bills Can I Pay?

Money from your life insurance policy can go toward any medical costs, including:

  • Hospital bills
  • Doctor bills
  • Prescriptions
  • Medical equipment
  • In-home care
  • Nursing home fees
  • Dental and vision costs
  • Medical travel

The cash is yours to use as you see fit. As long as you itemize deductions, uninsured medical expenses over 7.5% of AGI are tax deductible[5].

Using Life Insurance for Medical Debt

If you’re struggling with high medical bills, your life insurance policy could help. Tap into its cash value to free up money to pay what you owe. Just be sure your family will still have enough life insurance proceeds after you access the funds. And look into all the tax implications – you don’t want any costly surprises.

With some smart planning, you can leverage money you’ve already put toward life insurance to take care of medical debt. Explore all your options and use your policy to its full potential.

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