Paying off debt and saving for retirement continues to be a challenge for many people due to the ever-increasing costs of goods and services. Even one medical emergency can wipe out years of savings if you aren’t careful. Looking at ways to downsize and improve your finances is often a top concern for most seniors.
If you are getting closer to retiring, consider the cash value of your life insurance. A life settlement makes it easier to get the funds you need to pay off expenses or even lead to an early retirement. Learning about permanent life insurance is critical if you require a liquid asset.
What is Considered a Liquid Asset?
A liquid asset allows you to convert quickly into cash without causing a significant loss in value. Common examples of liquid assets include money in your bank account, stocks, bonds, mutual funds, securities, and money market funds.
On the other hand, real estate, cars, and jewelry aren’t considered liquid assets due to the potential of them losing value, and it’s a more complex process to convert these assets into cash. Relative liquidity is essential, as it measures your ability to meet short-term obligations with enough cash flow.
Does Life Insurance Count as an Asset?
Liquidity often applies to permanent life insurance due to its accumulated cash value over a long period. However, liquidity doesn’t usually apply to term life insurance because it has no cash value element.
Permanent life insurance provides a different kind of liquidity depending on the policy. For example, whole life insurance is considered a much more liquid asset than variable life insurance because it grows at a set interest rate. On the other hand, a variable life insurance policy depends on the value of the ever-changing financial markets.
Some policies also allow you to receive cash value through a viatical settlement. This agreement allows a person suffering from a terminal illness to sell their policy to another third party at a value less than the death benefit. Sometimes you can receive cash anywhere from 50-70% of the death benefit during a viatical settlement.
Liquidity of Your Life Insurance Policy
The liquidity of life insurance is primarily based on the type of policy you own. Typically, permanent life insurance is an asset, while term life insurance isn’t usually a liquid asset. Permanent life insurance provides you with a death benefit for the remainder of your life if you keep paying your premiums. These premiums often stay the same throughout the policy. Permanent life insurance also includes a savings component known as cash value. Part of each payment is used in a savings account to earn interest or may be invested in the stock market.
Permanent life insurance does cost more than term life insurance due to the cash value deposits, but it also gives you the flexibility to borrow or withdraw based on its cash value balance. It’s also important to remember that these loans or cash withdrawals will decrease the policy’s death benefit until they are repaid.
Why Term Life Insurance Isn’t Usually a Liquid Asset
Term life coverage has an expiration date, usually lasting anywhere from 10 to 30 years. Once the period is over, you can renew the policy, but the premiums will be more expensive. Term life insurance only offers a death benefit and doesn’t build any cash value over time, which is why it isn’t considered a liquid asset.
However, the only exception is if term life insurance is switched to a permanent life insurance policy. A convertible term policy makes it possible to take advantage of a permanent policy’s benefits, whether using the cash value to earn interest, selling your life settlement for cash, or even borrowing against the policy’s overall value.
Deciding to sell your policy is a great way to access cash to help you fund your retirement or if you need to pay off any significant debt or medical expenses. Working with a broker is vital in receiving guidance throughout the process. Choosing a life settlement is often an excellent option to help you live a more comfortable life.