4 December 2014 0 Comments

The Greatest Debt Reduction Tools

12.04.14 LII Blog G+Most of us carry a certain amount of debt. It might be as major as the mortgage on your home or only the monthly balance on credit cards. It’s how we live in America…and as long as it is properly managed, debt can be a good thing. It allows us to purchase homes that could never be afforded if a single payment were required. It provides instant cash when it is needed for timely purchases that make sense even if funds are not immediately available and liquidation of other assets is not advisable. Debt can assist when needed to cover the cost of unexpected emergencies.

 

The key to debt management is to keep the total amount borrowed from exceeding your ability to repay out of future earnings. That’s all well and good, as long as future earnings continue. When earnings reduce or stop entirely the obligation to repay the debt continues. There are two occurrences that are unpredictable and will totally stop all future earned income: Disability and Death. So, before incurring a mountain of debt it is important to determine how to manage that obligation under either of these scenarios.

Disability Income Insurance will provide income in the event an accident or illness is the cause of your income cessation. Every person who is dependent on their earned income to meet the everyday necessities or life—including debt obligations—should have disability insurance. This has nothing to do with medical expense reimbursement insurance or Obamacare; they pay for your doctor and hospital care, but do not give you cash for other needs that continue. True, Social Security does provide a disability payment, but only for total disability and after 6 months. Any government program will not likely be sufficient for you to repay debts—and—maintain an acceptable living style.

 

If your employer either continues income for you during disability, or pays a premium for your disability insurance for which you do not report taxable income, then any disability payments you receive will be taxed as ordinary income. If you purchase your own disability income policy with after tax dollars, any benefit received from that policy is tax free.

 

Life Insurance proceeds paid at your death are paid to your beneficiaries free of state and federal income tax and can be used to at least get you out of this life without leaving a debt for those you leave behind. During your income producing years—assuming you are insurable with no major medical condition or history—it is inconceivable that you cannot afford enough life insurance to cancel all your debts. At the very least, consider a 10 year term policy to cover current and anticipated indebtedness. You won’t believe how affordable it can be…and how good it will make you feel.

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