Compared to most other types of insurance, life insurance is a fairly simple product.
Depending on the carrier you visit and the type of coverage you want, it typically only takes a handful of questions to generate a quote. Still, there is one thing that can make comparing quotes and carriers even more difficult that you may not have thought about – liquidity.
Are you confused by this term when looking at quotes? Don’t worry, we have you covered.
Here is everything you need to know about the liquidity in life insurance and why it matters.
The Definition of Liquidity in Life Insurance
Liquidity in life insurance is the ability to quickly access funds in an emergency. You can also use it in order to take advantage of an investment opportunity.
Liquidity in life insurance products is achieved by having some form of surrender value. This is the amount of money the policyholder can receive if their policy is cashed in prior to maturity (the end of the policy term).
The higher the surrender value, the more liquid the product. Some life insurance policies have additional features, such as withdrawals and loans, which can provide policyholders with added liquidity in an emergency situation. Ultimately, liquidity in life insurance products can be a lifeline for policyholders in times of need.
Liquidity is very important as it provides security that money will be available when needed. Making sure these funds are accessible without needing to liquidate investments or take out additional loans.
Different Types of Liquidity in Life Insurance Policies
Withdrawing or borrowing against a life insurance policy is relatively easy and has tax advantages for those taking out a loan. Also, life insurance policies that have been in effect for long enough may generate cash or loans without any surrender charges or tax.
Here are the common ways to access liquid assets with your insurance policy:
Pay Policy Premiums
One alternative option for premium payments is to access cash in a life insurance policy to pay premiums. This process means that you are tapping into the cash value of your policy to redeem funds. Using the funds to pay for your premium costs. This will lower the death benefit you would receive to your designated beneficiaries but may be a viable solution for those who are seeking short-term assistance in this area.
Make a Withdrawal
Withdrawing cash can be done as a single payment or in regular withdrawals over a period of time. Depending on the type of policy, you may also be able to withdraw the remaining balance or part of the surrender value on the policy upon request. Withdrawal funds would be subject to taxes and may also involve surrender charges.
Supplement Retirement Income
Taking out cash from a life insurance policy can offer retirees a source of steady income. Policies with cash value can easily be accessed through policy loans, surrendering the policy, or exchanging the policy for an annuity. By accessing the cash value of a life insurance policy, retirees can use the funds to pay for home repairs, medical bills, and other everyday expenses.
Total Surrender
In this type of policy, you can cash in the policy or surrender the policy and receive a lump-sum payment. The amount you will receive is typically the surrender value of the policy. It is the cash value minus any surrender charges.
Before you decide to do this, be sure to review the terms of your policy so you understand any potential fees or other costs associated with cashing in the policy. You may also need to submit paperwork to the insurance company authorizing the total surrender.
Take Out a Loan
When you have a permanent life insurance policy, you can take out a loan against it. This means you can use the value of the policy to take out a loan for whatever purpose you may need it for. The great thing about taking out a loan against a life insurance policy is that the loan does not have to be repaid until you die and your beneficiary receives the death benefit. The interest must be paid on the loan and will be deducted from the death benefit upon your passing.
Life Insurance Policies That Offers Liquidity
Certain life insurance policies can be quite liquid. With them, you will have the ability to retrieve funds quickly, and this liquidity is often used to pay for unexpected expenses or to reinvest in a new policy. Here are some examples:
Whole-Life Insurance
Whole-life insurance offers either fixed or variable interest rates to increase the policy’s cash value. This cash value can be accessed through the withdrawal or surrender of the policy. You can also take advantage of infinite banking to get lower rates of interest. Make sure to check with your provider about the advantages of infinite banking.
With whole-life policies, part of the premium is paid to the insurer and part goes into the cash value account which earns interest. This cash value account offers more flexibility than term life policies where the cash value cannot be accessed.
Universal life
Universal life, like all other life insurance policies, offers policyholders the ability to borrow or withdraw funds when needed. This is done by utilizing the “cash value” associated with the policy. Universal life policies offer particularly high levels of liquidity as the policyholder has greater control over when and where to make premium payments and how to adjust the death benefit.
Guaranteed-Issue Life Insurance
To be truly liquid, a life insurance policy must have the ability to be cashed out, or at least to have the ability to tap into the surrender value of a policy, without a penalty and without waiting for a certain amount of time to elapse before access to the full surrender value is allowed.
Guaranteed-issue life insurance provides an excellent opportunity for liquidity as the policy does not require a medical examination to qualify, and because of this, the cash value of a policy can usually be accessed within a short period of time of taking out the policy.
Reach Your Financial Goals With Liquidity in Life Insurance
Life insurance is a powerful tool to protect you and your family financially. With liquidity in life insurance, you have the flexibility and security that comes with converting cash values into income.
With the right strategy, liquidity can help you reach your financial goals. Contact a knowledgeable life insurance professional today to discuss your liquidity needs.
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