What does liquidity refer to in a life insurance policy?
Liquidity in life insurance refers to how easy it would be for you to access cash from your policy. While life insurance policies are structured to provide financial security to your beneficiaries upon your passing, some may allow you to access cash while you're still living — they would be considered more liquid.
Is whole life insurance a liquid asset?
Yes, whole life insurance is considered a liquid asset. Any life insurance policy with cash value can be considered a liquid asset, which includes all permanent life insurance policies like final expense and universal life in addition to whole life.
Examples of liquidity in a life insurance policy
Examples of liquidity in life insurance include anything that allows you to easily access cash via your policy:
- Taking out a loan: Life insurance loans are a form of liquidity that let you borrow from your permanent life insurance policy's value (if it has grown enough). As long as your premiums have been paid on time and you have sufficient cash value for the loan, a life insurance loan lets you skip the usual loan approval process and have no fixed repayment schedule. Note that there will be a maximum amount you can borrow without causing a life insurance policy lapse.
- Using your policy as loan collateral: Often required for business loans, a life insurance policy can be used as collateral for obtaining a loan from a lender. This allows you to access cash liquidity via a traditional loan.
- Surrendering your policy: If you need to access your life insurance policy's full value in the form of cash, you may be able to surrender it back to the insurer. This option involves permanently terminating your coverage in exchange for the policy's cash value (or a portion of it).
Can I make my term life policy liquid?
Unlike permanent life insurance policies, there's typically no liquidity in a term life policy. However, you might be able to convert your term life policy into permanent coverage, which would give you a cash value component, and therefore liquidity.
Life insurance liquidity for beneficiaries
The death benefit of a life insurance policy is considered a liquid asset to the beneficiaries who successfully claim it. Once claimed, the payout is cash that can be used for any purpose. It's no longer tied up in the policy, making it even more liquid than when the insured was still alive. Many choose to purchase life insurance because it can be a way to make sure their loved ones inherit a liquid asset — rather than a fixed asset like property, which needs to be sold before it's turned into cash.