Should You Abandon Life Insurance When Getting Out of Debt?

by Kevin on October 20, 2011

If you are in debt your primary focus should be to get out of debt as quickly as possible. That means cutting back drastically in as many areas of your budget as possible. As you are analyzing what to cut back on — eating out, cable, and so on — you might be tempted to cut out your life insurance payments. But is that the best decision?

When Dropping Life Insurance for Debt Makes Sense

There are varying levels of being in debt. If you are so overwhelmed with your debt and minimum payments that your choice of what to cut comes to one of the four main things you need to live and your life insurance, then drop your life insurance. You absolutely must have: food, water, a roof over your head, and clothing. Close behind those is a method of transportation to get to employment so that you can continue to earn money to pay off your debt, but transportation doesn’t necessarily mean keeping your expensive car.

If it comes down to eating or dropping your life insurance, then of course you have no other option than to drop your insurance and hope for the best. However, you should aim to be re-insured as quickly as possible as your financial situation stabilizes.

When Dropping Life Insurance for Debt Doesn’t Make Sense

If you are not in the above situation — where it is eat or pay for insurance — then dropping your life insurance can be a horrible financial decision. Term life insurance is an incredibly inexpensive product with premiums well under $100 per month for relatively healthy individuals. You should cut cable, internet, and other premium services before considering cutting your life insurance.

Why? Because dropping your life insurance can devastate your family.

Why Dropping Life Insurance Can Devastate Your Family’s Finances

If you are severely in debt, your family is reliant upon every penny you can bring in. Every month that you are drawing paychecks is another month that you’ve bought to get things right financially. You can cut back on your expenses and use what is left to pay down your balances. No matter how deep in debt you are, by making positive moves forward in your situation you can find yourself in decent financial position based on simple awareness and action.

Now remove yourself from the situation. Your family is left with one or no income to not just pay debt off, but to live off of. This is tragic and completely devastating impact on both the emotional and financial side of life.

Being in debt is a bad place to be. What could be worse? Having one of the two income providers of the family die unexpectedly and never being able to recover the lost income. Without the additional family income, your family that is left behind after your death will likely go bankrupt. It isn’t pleasant to think about, but a policy of $250,000 to $750,000 per year would be able to wipe out any debt your family had and provide ample time for adjustments in spending to be made.

With term life insurance costs being so low — many policies are available for $20-40 per person — the impact you could have on your debt with your premium money is relatively low. However, the financial impact of not having insurance when your family most needs it can be ruinous. Avoid dropping your life insurance at all costs.


Golfing Girl October 20, 2011 at 9:16 pm

I can’t imagine a scenario where someone is so destitute that they can’t afford to eat, yet they are up to date on their life insurance premiums. I would work to keep current with them at all costs, or find a shorter term that you can afford with a smaller payout and get a different policy if you can’t afford the premium.

As a stay at home mom, I lost the $400K policy I had through work but had a $200K policy separate from work. When our 3rd child was on the way, we realized I was underinsured, as my husband would have to hire a nanny and housekeeper to replace me. So we purchased another policy to fill that gap to give us peace of mind.

Don’t always count on an employer’s policy–you should always have an independent source as a backup in case you lose your job or are between jobs.

Derek October 20, 2011 at 10:55 pm

If you find it difficult to keep up with your debts and bills, what is your family going to do if you tragically pass away (especially if you are the breadwinner)? The life insurance may be the only money they have to survive on. I would keep it at all costs to ensure their future if something happened to you.

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