Understanding Liquidity in a Life Insurance Policy

Life insurance policies’ main purpose is to give your dependents financial support after your death. However, some variants of life insurance offer additional features that enable you to get cash from your life insurance policy while you’re still alive. Liquidity in life insurance refers to the possibility of the policyholder getting cash from their policy.  Essentially, any life insurance policy with a cash value component has liquidity.  This means the policyholder can surrender their policy for a guaranteed amount of money (surrender value) or, if the policy has an investment component, withdraw money from it.  A life insurance policy with a liquidity aspect can boost your retirement or emergency funds.

Here’s detailed information on this topic.

Why Life Insurance Is a Liquid Asset?

Some variants of life insurance can be considered liquid assets. Liquid assets are things that you can easily turn into cash, such as your investment account. Life insurance is a liquid asset for your beneficiaries when they collect the death benefits. However, you can consider your life insurance policy a liquid asset in the following instances:

  • Your life insurance policy comes with a cash value component- Once the cash value has accumulated, you can withdraw cash from your policy, as you would from a retirement account.
  • You can exchange your insurance policy for cash – Policyholders who are elderly or serious may be allowed to sell their policy when they don’t need it anymore. Such arrangements are also called viatical settlements.

It’s worth noting that as an investment tool, life insurance policies have several drawbacks. Notably, they typically offer a relatively low return on investment (ROI). However, these policies can be useful if you’ve fully utilized your other investment options. An independent insurance agent will help you figure out if the liquidity offered by a policy suits your needs.

What Type of Life Insurance Policies Offer Liquidity?

Liquidity is offered by permanent life insurance policies with a cash value component, including variable, universal, and whole life insurance. Permanent life insurance is typically more expensive than term insurance partly because parts of the premiums are used to fund your cash value. Various types of life insurance grow cash value in varying ways. These include:

  • Whole life – The provider sets the rate at which cash value grows and offers a guaranteed minimum, similar to a savings account.
  • Universal life – The interest is hinged on the performance of the market index, and the provider sets the cap and floor on gains.
  • Variable life – You choose the funds in which your money is invested, and your gains or losses hinge on market performance.

Some life policies, such as variable and universal insurance, allow you to pay premiums using your accumulated cash value and thus free up your cash at hand for other investments and expenses.

How Term Life Insurance Contracts Can Be Converted into Liquid Assets?

While term life insurance isn’t a liquid asset, it comes with an option to convert into a policy that offers liquidity. Most term policies come with term conversion riders that allow you to convert all or some of your term insurance into a permanent life policy.

Is Getting a Life Insurance Policy That Offers Liquidity Worth It?

If you need more tax-deferred investment options and you can afford higher premiums, then carrying a cash value policy can be beneficial. But for a lot of people, it may be prudent to carry a term policy that expires once you retire and invest the cash you’ve saved by avoiding a cash value insurance policy.

At Reardon Agency, we can help you get a life insurance policy that suits your needs. Contact us today to get started!

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