If you're ever trapped in a room full of insurance agents, ask them innocently whether you should buy term or permanent insurance. You can make a clean getaway while they're arguing. They'll have strong opinions on the subject, because the two are very different. Term insurance is dirt cheap because it just gives you a death benefit. Permanent insurance has an investment component, which builds slowly for up to 20 years but then increases more rapidly. Over time, this builds up equity in the form of a cash balance. You can redeem or borrow against those funds to pay off your mortgage.
Read the most recent statement from your insurance carrier, looking for a figure described as the "net cash surrender value." This is the amount of equity built up in the policy.
Decide whether to withdraw the funds or borrow against them. Most carriers will allow you to borrow funds from the policy at a modest rate of interest -- and pay back the loan as, and when, you choose.
Request the funds from your insurance company. They'll usually send you a form to fill out and return. Some companies might send a representative to assist you, as well as explain any potential repercussions for your policy.
Deposit the funds and write your mortgage lender a check to pay off the balance of your mortgage.
- The idea of owning your house free and clear is very alluring, but do the math rather than relying on emotion. Your mortgage is probably the lowest-cost debt you own, and it provides you with a tax deduction as well (the interest you pay is tax deductible). It often makes more sense to use the funds in your policy as a low-cost way to pay down higher-interest consumer debt, including loans and credit cards. Talk to an accountant or financial planner, to assess whether it's advantageous for you.
- Cash values grow tax-free in a life policy, and withdrawing them might trigger tax repercussions depending on your circumstances. Consult your financial planner to see whether this applies to you.
- Your permanent life policy pays a specified value to your beneficiaries, plus the accumulated cash values. Removing the cash from your policy reduces the payout and slows the accumulation of new cash.
Fred Decker is a trained chef and certified food-safety trainer. Decker wrote for the Saint John, New Brunswick Telegraph-Journal, and has been published in Canada's Hospitality and Foodservice magazine. He's held positions selling computers, insurance and mutual funds, and was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.