Liquidity in life insurance is how fast and easy policyholders or beneficiaries can access life insurance policy benefits. When determining the flexibility of a life insurance policy, liquidity is an important factor to consider. Life insurance liquid assets are benefits that can be accessed quickly without any financial charges or delays.
These liquid assets include cash value in whole or permanent life insurance, which can be withdrawn or borrowed. While we have these, there are non-liquid assets that cannot be converted to cash. An example of this is the death benefit of a term life insurance policy. It can only be accessible after the policyholder’s death. While it is important to understand what liquidity is, it is also important to understand the differentiations between the two types of assets.
Policyholders often overlook this process, but it plays a vital role in financial security and planning. Knowing your policy liquidity helps you properly manage your financial portfolio. Your beneficiaries are also required to know how quickly and when they can access the policy cash benefits. In doing this, they will face little to no difficulties when it is needed.
Why is Liquidity Important in Life Insurance?
Liquidity is also referred to as the availability of liquid assets to a person, usually policyholders and beneficiaries. Generally, liquid assets are uniform to the amount of funds a person or business can access at any point in time.
However, liquidity in life insurance describes how quickly a policyholder or beneficiary can access their cash-out benefits. Liquidity matters in life insurance because it helps policyholders and their beneficiaries understand the flexibility of their policies as well as their access to benefits.
Types of Life Insurance Policies that Offer Liquidity
Permanent life insurance policies are the only life insurance policies that have liquidity. They come with cash value benefits policyholders can withdraw or borrow from. It pays out to beneficiaries after the death of the policyholder, and these payouts can be used for several purposes. Permanent life insurance is broken down into three types of policies and they all offer liquidity. These policies include:
- Whole Life Insurance Policy: It grows at a certain rate put in place by the insurance provider with a guaranteed minimum.
- Variable Life Insurance Policy: The policyholder selects the funds to invest in while gains and losses are based on the market performance.
- Universal Life Insurance Policy: Interest accumulates depending on the market index performance, with the provider setting the policy value’s highs and lows.
Irrespective of which of the following policies you purchase, they all offer liquidity accessible by both the policy owner and its beneficiaries.
Is Life Insurance a Liquid Asset?
No, only some types of life insurance policies offer liquidity. These policies are considered liquid assets and can be converted easily to funds. Once it is paid out to the policyholder’s beneficiaries, the death benefit is considered a liquid asset. However, a life insurance policy can be considered a liquid asset if it meets the following conditions:
- The policy accumulates or has an accumulated cash value.
- The insurance policy can be redeemed.
- The policy renounced.
If your policy falls under the following conditions, then it is considered a liquid asset.
How to Get Liquidity in Life Insurance
There are several ways to withdraw or borrow from your life insurance liquid asset. Withdrawing from your life insurance cash value is tax-free and is considered a return on premium. Before proceeding with this process, it is important to contact your life insurance provider or agent to gain knowledge about every tax involvement. The following are steps in how to get liquidity in life insurance:
• Trade your policy
You can decide to sell your life insurance policy for more than its cash value is worth but not above the death benefit. After this is done, the buyer will become the new policyholder and will be responsible for premiums for the rest of the policy. Trading your permanent life insurance policy can help you get some cash value if you are no longer able to pay premiums.
• Renounce your policy
By renouncing your policy to your insurance company, you may be opportune to access funds against your policy’s complete value. This process requires you to terminate your policy permanently to get your life insurance policy cash renounce value in return.
• Take a loan
If your cash value has accumulated enough, you can take a loan from your life insurance policy in the form of a loan. As long as premiums are continuously paid early and your policy has accumulated enough cash value, you can skip the loan application process. However, for these types of loans, there are no predetermined repayment terms, but you will have to speak with your insurer about the loan conditions.
