What Does Liquidity Refer to in a Life Insurance Policy – Liquidity in a life insurance policy refers to the ease with which policyholders can access the cash value of their coverage without suffering major penalties or delays. For individuals who see life insurance as a financial tool that can be used for investments. Or as a safety net for their loved ones in case of an emergency, it is important to understand what liquidity means in a life insurance policy.
The degree of liquidity offered by some life insurance products, such as whole and universal policies, affects the terms and circumstances in which policyholders can borrow against or withdraw from their cash value. To get a better idea of liquidity in life insurance, we encourage you to read to the end of this article. We have curated detailed and comprehensive information for you. This article aims to discuss What Liquidity Refer to in a Life Insurance Policy.
What Does Liquidity Refer to in a Life Insurance Policy?
Liquidity is typically a measure in which an individual can easily convert his asset to cash without affecting its market value. A company or business can easily settle short-term liabilities through liquidity. From the insurance standpoint, liquidity refers to the ability of a policyholder to withdraw a specific amount of money from his/her policy.
Life insurance is typically designed to provide financial assistance to the beneficiaries if the policyholder passes on. Nevertheless, certain policies allow liquidity when the policyholder is still alive. Here, the policyholder can borrow against his/her policy to cover a major event in life. For instance, if you were diagnosed with a serious health issue, you can borrow against your cash value to cover all related expenses.
What Type of Life Insurance Policy Offers Liquidity?
Majorly, three types of permanent life insurance policies allow policyholders to easily withdraw funds from their active policy; they include:
- Whole Life Insurance
- Variable Life Insurance
- Universal Life Insurance
These permanent life insurance policies feature in-built liquidity for policyholders. The cash value of these policies is readily available and can easily be accessed if the policyholder needs to settle a major expense. You may decide to sell your permanent life insurance policy or withdraw a specific amount of money from it.
How Can I Receive Liquidity On My Life Insurance Policy?
If you wish to borrow or get money from your life insurance policy, there are several ways to go about it. But before then, it is advisable to contact a life insurance agent. Or financial advisor to have a better understanding of the tax implications attached. That being said, highlighted below are several ways in which you can receive liquidity in your life insurance policy:
Sell Your Policy
Most people sell their life insurance policy due to the inability to meet the premium payments. Perhaps you cannot afford to keep paying for the policy; you can sell the policy and make a substantial amount of money from it. It is also possible to sell your permanent life insurance policy for more than the actual cash value. However, the amount you are selling to the new buyer must not be above the death benefit.
Surrender Your Policy
If you surrender your life insurance policy to your insurer, you may be able to get the entire cash value of your policy. You can cash out the entire value of your life insurance just by surrendering your policy. This method offers instant cash, but it also cancels the policy and the corresponding death benefit.
Take Out a Loan from Your Policy
Another way in which you can receive liquidity on your life insurance is by taking out a loan from your policy. Most insurance companies allow policyholders to borrow against the cash value of their permanent life insurance policy.
Usually, there is no credit check required for the loan amount you want to borrow, and you can pay it back gradually. However, if you have an unpaid debt on your policy, it can ultimately lower the death benefit to be paid to your beneficiaries.
Pros of Liquidity in Life Insurance
Liquidity in life insurance policies offers several advantages to policyholders, which helps to enhance financial security and flexibility. Enumerated below are some of the key benefits of liquidity in life insurance:
- Access to funds for emergencies
- Financial flexibility for investments
- Peace of mind knowing you can access your cash value at any time
- No credit check is required for loans
Cons of Liquidity in Life Insurance
Here are some of the disadvantages of liquidity in life insurance:
- Cash value often takes time to accumulate.
- If your loans are unpaid, it can lead to a reduced death benefit.
- Interest on policy loans
- If the policy is cashed out, it may result in surrender charges.
- Risk of policy lapse
FAQs
How can I access the liquidity in my life insurance policy?
Typically, policyholders can access liquidity on their permanent life insurance policies through various means. You can take out a loan, make a partial withdrawal, or surrender your policy in exchange for the full cash value.
Are there any tax implications when accessing liquidity?
Although policy loans are normally tax-free, withdrawals that exceed the total amount of premiums paid may be taxable. It is important to consult a financial advisor to make informed choices as regards accessing liquidity on your policy.
What happens if I don’t repay my loan?
In a situation where you don’t repay the loan you took against the cash value of your policy, two things are bound to happen. One, the interest on the loan will keep going up, and the other one, it can lead to a reduction in your death benefit. A reduced death benefit can automatically result in policy lapse if it falls below the required level.
