What Does Liquidity Refer to in a Life Insurance Policy? Hidden Treasure in Your Policy

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Learn what liquidity means in a life insurance policy, how different types of policies offer different levels of liquidity, and how you can access the cash value or death benefit of your policy/PHOTO COURTESY: Facebook

When you buy a life insurance policy, you are not only protecting your loved ones from financial hardship in case of your death, but you are also creating an asset that can have liquidity.

Liquidity refers to how easily you can convert an asset into cash without losing its value.

Cash is the most liquid asset, while other assets, such as real estate, art, or collectibles, are less liquid and may take longer or cost more to sell.

Liquidity is an important factor to consider when choosing a life insurance policy, as it can affect your financial flexibility, tax implications, and estate planning.

In this article, we will explain what liquidity means in a life insurance policy, and how different types of policies offer different levels of liquidity.

And how you can access the liquidity in your policy.

What Does Liquidity Refer to in a Life Insurance Policy?

Liquidity in a life insurance policy refers to the availability and accessibility of the cash value or death benefit of the policy.

The cash value is the amount of money that accumulates in a permanent life insurance policy, such as whole life or universal life, over time.

The death benefit is the amount of money that the policy pays to the beneficiary upon the death of the insured.

The cash value and the death benefit are two different sources of liquidity in a life insurance policy.

The cash value is available to the policy owner during their lifetime.

While the death benefit is available to the beneficiary after the death of the insured.

The cash value and the death benefit may also have different tax treatments, depending on how they are accessed.

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What Types of Life Insurance Policies Offer Liquidity?

Not all types of life insurance policies offer the same level of liquidity.

Generally, permanent life insurance policies, such as whole life or universal life, offer more liquidity than term life insurance policies, which only provide a death benefit for a specified period.

Permanent life insurance policies have a cash value component that grows over time, usually at a guaranteed rate.

The cash value can be accessed by the policy owner through withdrawals, loans, or surrendering the policy.

However, accessing the cash value may reduce the death benefit, incur fees or charges, or trigger taxes.

Term life insurance policies do not have a cash value component and only pay a death benefit if the insured dies within the term of the policy.

Which can range from one to 30 years.

Term life insurance policies do not offer any liquidity during the insured’s lifetime unless they have a rider that allows them to access a portion of the death benefit in case of a terminal illness or a chronic condition.

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How Can You Access the Liquidity in a Life Insurance Policy?

There are different ways to access the liquidity in a life insurance policy, depending on whether you are the policy owner or the beneficiary, and whether you are accessing the cash value or the death benefit.

If you are the policy owner and you want to access the cash value in your permanent life insurance policy, you have three main options:

Withdrawals:

You can withdraw a portion of the cash value from your policy, up to the amount of premiums you have paid.

Withdrawals are usually tax-free, but they may reduce the death benefit and the cash value of the policy.

Loans

You can borrow money from your policy, using the cash value as collateral. Loans are not taxable.

However, they accrue interest and reduce the death benefit and the cash value of the policy.

You do not have to repay the loan, but if you do, you can restore the death benefit and the cash value of the policy.

Surrender

You can cancel your policy and receive the cash value, minus any fees or charges.

Surrendering your policy is taxable to the extent that the cash value exceeds the premiums you have paid.

You also lose the death benefit and the coverage of the policy.

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How Beneficiaries Benefit From Life Insurance Liquidity

Liquidity is not only important for the policy owner but also for the beneficiary.

The death benefit of a life insurance policy provides liquidity to the beneficiary, who can use the money to pay for various expenses, such as:

  1. Funeral costs
  2. Estate taxes
  3. Debts
  4. Mortgage
  5. Education
  6. Living expenses
  7. Investments

The liquidity of the death benefit can help the beneficiary cope with the financial impact of losing a loved one, and also achieve their financial goals.

The beneficiary can choose how to receive the death benefit, depending on their needs and preferences.

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