Is Life Insurance a Liquid Asset?
In this era of constantly escalating living costs, few people are able to avoid debt or adequately save for retirement. Even a single medical emergency can derail years of saving and as a result, people are working longer to pay off debt or looking for ways to downsize their expenses so they can retire before they’re 70.
If you’re nearing retirement and wondering if there’s any way to stop working earlier, or if you’re currently retired and want to ensure you have enough money to live comfortably — it’s important to take a close look at your finances to see if you have any liquid assets. With this in mind, a lot of people wonder if their life insurance policy is considered an asset, and if so, is it a liquid asset?
The short answer is that it depends on the type of life insurance policy you have. In this guide, we’ll explain everything you need to know about liquid assets and clearly explain which types of life insurance policies are considered an asset.
What is a liquid asset?
Liquidity refers to the ability of an asset to easily be converted into cash. Thus, liquid assets are assets that can quickly be converted into cash without a significant loss in value. Liquid assets tend to be intangible, meaning they usually aren’t physical assets you can touch or hold in your hands like a home, car, or jewelry (all of these are fixed assets). Both businesses and individuals can have liquid assets, although businesses commonly referred to them as “current assets” on their balance sheet.
What is an example of a liquid asset?
Common examples of liquid assets held by individuals include:
- Money in a checking or savings account
- Mutual funds
- Money market funds
Why are liquid assets important?
Liquid assets are important because in the case of an emergency, they allow you to quickly obtain cash without a significant loss of value from the asset. By comparison, if you needed cash now and had to sell your house or other fixed assets as soon as possible, you may have to settle for less money than you’d prefer due to the urgency of the situation.
While fixed assets contribute to your net worth, liquid assets show the cash you have immediate access to. In fact, banks will look at your assets and determine how liquid they are when you apply for a home loan. This helps them determine your ability to quickly access money and cover mortgage payments in the case of financial hardship.
What does liquidity refer to in a life insurance policy?
Certain types of life insurance policies build cash value as you pay premiums throughout your life. The liquidity of a life insurance policy refers to how easy it is to tap into this cash value. For example, some whole life insurance policies earn tax-sheltered interest and let you withdraw this money as needed (although some may include restrictions on when or how much you can take out). In this case, the policy would be considered liquid since you have easy access to the cash value.
Which types of life insurance policies are considered assets?
When you think about life insurance, you most likely think about the premiums you pay each month. Since you’re paying money, how exactly are these assets? The cash value you build through monthly premiums makes certain types of life insurance policies liquid assets because you can withdrawal money you’ve put in. Furthermore, some life insurance policies can also be sold for a large, lump cash sum making them a highly valuable liquid asset.
Permanent Life Insurance
Permanent life insurance covers you for your entire life as long as you pay fixed premiums (they never go up, even as you get older). There are several types of permanent life insurance policies such as whole life, universal, variable, and indexed universal. All of these policies feature a savings or investment component that builds cash value over time, making them a liquid asset. The downside of permanent life insurance is that premiums are typically far higher than with term life policies.
Term Life Insurance
Whereas permanent life insurance covers you throughout your entire life with fixed premiums that never raise, term life policies are for a specified amount of time between one to 30 years and can raise after the expiration of the policy. Once the period ends, the policyholder can choose to renew or find a new insurance plan. Term life policies are not considered an asset because they do not build cash value over time. However, some term policies feature an option that enables you to convert all or a portion of your death benefit into permanent life insurance at a later date. Thus, a convertible term policy may be considered an asset because it has the ability to become a permanent life policy with cash value.
Which types of life insurance policies can be sold?
Not all types of life insurance policies can be sold. Typically, you need to have a variable, universal, or convertible term policy to be eligible to sell your policy through a transaction known as a life settlement. If the insured policyholder is terminally ill, standard term policies may also be eligible for a similar option known as a viatical settlement. Other factors that affect eligibility include the age and value of the policy, along with the age of the policyholder.
If you’re curious about your eligibility to sell and the potential value of your policy, Harbor Life Settlement can provide you with a FREE, no-obligation policy estimate. You may be eligible for up to 60% of the death benefit value for your policy in cash now. Our team will walk you step-by-step through the process and you are free to walk away at any time.
If you do decide to sell, you’ll receive a lump cash sum that can be used however you’d like. Life settlements are a popular choice for seniors, as the extra money can be used to fund retirement and make the most of your golden years. Few people realize their life insurance policy is an asset, so make sure you’re aware of its value.
Contact Harbor Life Settlements today and find out how much your life insurance policy is worth!