We are all familiar with the concept of the life insurance policy and chances are that you must be having one too.
The main purpose of a life insurance policy is to provide financial support to your family if in case you pass away.
But the thing here is your family can only get that financial support if you pass away, they or you won’t be able to redeem the amount if you are alive. But there is an additional feature in a life insurance policy that can allow you to redeem the amount when you are healthy and thriving.
This feature is known as the liquidity of a life insurance policy.
You must be wondering what does liquidity of a life insurance policy even mean? In this blog, we will get a deep look into the concept of liquidity in a life insurance policy.
What Does Liquidity Refer to in Life Insurance?
Liquidity in a life insurance policy is a measure of the ease by which you can get cash from your policy while you are alive. Therefore your policy must have a cash value.
Now, this feature if liquidity is not available in your term life insurance, but you can get this feature in whole life insurance.
Your life insurance policy is a liquid asset if it contains the following points.
It Has a Cash Value
It means that once your cash value has grown, now you can withdraw money from your life insurance policy just like a retirement account.
It Has the Ability to be Sold
This concept is also known as viatical settlement, it means that you can sell off your life insurance policy if you no longer needed it.
By this, it can be converted into cash readily.
You Can Surrender Your Policy
If you no longer need your policy or let us say that you are not able to afford it, then you can surrender your policy and receive some cash in return.
In each case, your life insurance policy can give you in-hand money readily. However it is not the best idea to sell or surrender your policy because you will not receive the whole invested amount, you will only receive a percentage of that amount.
Which Type of Life Insurance Policies Offer Liquidity
If you have term life insurance then you will be not awarded the benefit of liquidity, but still, you have an option to turn it into a policy with liquidity. Liquidity is included in permanent life insurance with cash value which includes whole, variable, and universal life insurance.
Also, permanent life insurance is almost 5 to 15 times more expensive than term life insurance.
Now let us take a look into the type of permanent life insurance.
Types of Permanent Life Insurance that Offer Liquidity
These are three types of permanent life insurance that offer liquidity.
Whole Life Insurance
It is like a savings account and your investment increases with a fixed rate of interest.
Universal Life Insurance
The interest is dependent upon the market index performance and a floor and a cap on gains is set, which is determined by the provider.
Variable Life Insurance
You can choose the fund in which you want to invest and the gain and loss are dependent upon the market performance.
Does Term Life Insurance Provide Liquidity?
No, term life insurance does not provide you liquidity.
People prefer term life insurance because it has fewer premiums when compared to permanent life insurance.
However, many life term policies have an option to convert them into permanent insurance policies like whole or universal life, you can then begin to collect the liquid cash value.
Is it worth it to get life insurance with liquidity?
If you are comfortable in paying costly premiums in return for an additional tax-deferred investment account then getting a cash value life insurance policy is the best for you.
Some people may be intimidated by the cost of permanent life insurance, but it depends on from person to person.
You can go with term life insurance policies that expire during or at starting of your retirement years and then you can look for options to convert it into a cash value life insurance policy.
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So this was all about what liquidity means in life insurance.
You can go for permanent life insurance if you want liquidity in your policy or you can go with term life insurance if you do not want liquidity.
Whatever the case may be none of them is a better option than the other, the choice depends upon the situation.
Which kind of insurance do you think is good? Do tell us in the comments.
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