What Does Liquidity Refer To In a Life Insurance Policy

What Does Liquidity Refer To In a Life Insurance Policy?

Life insurance can be confusing. And not just the policies themselves. There’s also all sorts of jargon that life insurance agents throw out there. 

One of the terms you may have heard about is liquidity. Or liquid asset. But what does liquidity refer to in a life insurance policy? Well, that is exactly the question we’re going to dig into here. Hopefully in about 2-3 minutes, you’ll have the answer and know exactly what that term means.

So let’s get right to it…

What Does Liquidity Refer To In a Life Insurance Policy? 

So what exactly is liquidity? The term liquidity refers to the cash value that a policyholder has in a life insurance policy. 

It is the ability of a policyholder to withdraw the cash that he/she invested in a life insurance policy while he/she is still alive. The term can also refer to the policyholder’s ability to borrow on the cash value. 

However, there may be restrictions on a life insurance policy’s liquidity. 

What Is A Liquid Asset?

A liquid asset refers to something that the policyholder owns that can be liquidated (basically this means it can be turned into cash). I{n the case of life insurance, the policyholder’s investment account is a liquid asset. 

The death benefit that the beneficiaries will receive upon the policyholder’s death is also a liquid asset. However, for the life insurance policy to be considered a liquid asset, it has to:

  • Have a cash value. If the cash value has grown, the policyholder can withdraw money from the policy. 
  • Be capable of being surrendered for cash. Meaning, if the policyholder does not need, or can no longer afford a permanent life insurance policy, he/she can surrender it in exchange for some of the cash that he/she invested. 
  • Be a viatical settlement. A viatical settlement means that a policyholder may be able to sell their life insurance policy if they do not need it. This applies to elderly or seriously ill policyholders. 

Not All Life Insurance Policies Have Liquidity

The main goal of enrolling in a life insurance policy is to provide a family financial assistance if the policyholder passes away. 

However, some life insurance policies are available with extra features such as liquidity or the ability to withdraw cash while the policyholder is still alive. Not all life insurance policies have liquidity and it will depend on the type of life insurance policy if it will have liquidity. 

Which Ones Do?

So what types of life insurance policies have liquidity? 

The answer to that is the life insurance policies that include the cash value component, which is mainly permanent life insurance policies such as whole, variable, and universal life policies. 

But even though permanent life insurance policies allow you to liquefy assets, enrolling in one is 15 times the cost of enrolling in a term life insurance policy. 

Whole life insurance policies allow policyholders to build cash value that will grow over time. This type of life insurance policy also offers a way to save money and earn tax-sheltered interest. 

Meanwhile, universal life insurance policies allow the policyholders to earn interest based on their market index performance with a floor and a cap on gains that are set by their provider. V

Variable life insurance allows policyholders to choose which funds to invest in gains and losses based on their market performance.