The main purpose of life insurance is to provide your family with financial support when you pass away. However, some types of life insurance come with additional features that allow you to withdraw money from your policy while you’re alive.
Liquidity in life insurance refers to how easily you can access cash from your life insurance policy. Life insurance policies with a cash value component, such as whole life insurance, are considered to have liquidity because you can easily withdraw from them or surrender the policies for money.
On the other hand, a term life insurance policy doesn’t have liquidity because it doesn’t have cash value. Most people only need the simple coverage a term policy provides: a lump-sum payment to your loved ones after you die. However, having liquidity in your life insurance can boost emergency or retirement funds for those with more complex financial needs.
Is life insurance a liquid asset?
Only some types of life insurance have liquidity. A liquid asset is something that you own that can be easily liquidated — i.e., turned into cash — such as your investment account.
Your life insurance policy is a liquid asset for you if:
Your policy has a cash value: Once your cash value has grown, you can make withdrawals from your policy much like you would from a retirement account.
You can surrender your policy for cash: If you no longer need or can’t afford a permanent life insurance policy, you can surrender it and receive some of your cash value in return.
You’re able to sell your life insurance: Elderly or seriously ill policyholders may be able to sell their life insurance policy if they no longer need it. This is also known as a viatical settlement.
Even though liquidity can be a desirable feature, life insurance isn’t usually the best way to build your assets. A policy sale or surrender would earn you much less than what you’ve paid into the policy, while cash value investments have low interest rates. But these policies can be valuable if you’ve maxed out other investment options — or as ways to raise cash in an emergency.
A certified financial planner or independent insurance agent can help you decide if a policy with liquidity fits your needs.
Is life insurance considered a good investment?
Which types of life insurance offer liquidity?
Liquidity in life insurance most frequently applies to permanent life insurance policies with a cash value, including whole, universal, and variable life insurance. A cash value account grows as you pay your premiums and you can use the account to borrow from if you need to.
Permanent life insurance costs significantly more than term life insurance, in part because a portion of your premiums go toward funding your cash value account. Different types of permanent insurance grow your cash value in different ways and offer a greater potential return on your investment — and therefore more liquidity.
Whole life insurance: Grows at a rate set by your provider with a guaranteed minimum, like a savings account
Universal life insurance: Earns interest based on market index performance (e.g., the S&P 500) with a floor and a cap on gains set by your provider
Variable life insurance: You choose which funds to invest in; your gains and losses depend on market performance
Some policies, such as universal and variable universal insurance, let you use your accumulated cash value to pay your premiums. This frees up your cash on hand for other expenses and investments.
Learn more about the differences between term and permanent life insurance
How can liquidity be written into a term life insurance contract?
Term life insurance isn’t a liquid asset, but it does have an option to become a policy with liquidity. Most policies have a term conversion rider that lets you turn some or all of your term coverage into a permanent policy. A rider is an add-on to a life insurance policy that gives you additional benefits.
The option to convert your policy gives you the ability to extend your coverage, potentially at a lesser amount, if you still need it toward the end of your term.
If you don’t have convertible term life insurance, ask your insurer about adding a conversion rider to your policy.
Do you need life insurance with liquidity?
Buying a life insurance policy with liquidity is best for people who can afford the costly premiums and would benefit from a cash value account. For most people, the high cost of permanent insurance and low rate of return on the cash value make it a bad investment.
It’s better for your long-term finances to buy a term life insurance policy that expires in your retirement years and invest the money you saved by skipping a cash value policy and investing in a 401(k) or IRA instead.
If you later find you do need some liquidity in your life insurance, you can always explore term conversion options.
Learn more about the pros and cons of using life insurance as an asset
