Is Life Insurance a Liquid Asset? Liquidity in Life Insurance

The three pillars of a solid personal economy are often considered to be certainty, growth, and liquidity. Today, we’re focusing on liquidity: what is it, and is life insurance a liquid asset too? Let’s unpack what it means when your account has liquidity, and why that’s such a critical component of your asset-base.

What is Financial Liquidity?

Financial liquidity is about how easily accessible your money is. US News defines liquidity as “the ease with which a security or asset can be converted into cash.” Liquidity matters, because we all experience times when we want cash quickly. If all your assets are tied up, it could take weeks or months to get spendable cash from your asset base, especially if you have to sell it off. 

A savings account is a highly liquid asset because all that’s standing between you and spendable cash is a withdrawal or a transfer. At best, this can be immediate, or it can take a few business days. 

Financial liquidity is most important if you’re building an emergency and opportunity fund. Because, naturally, if you’re experiencing an emergency or an opportunity, there’s a sense of urgency there. It’s quite possible that you’ll have hours or days to act, although some emergencies and opportunities can certainly have a longer timetable. Regardless, you want to build your fund somewhere accessible, rather than locking it away where it’s hard to get at. 

Liquid vs. Illiquid Asets

In addition to a savings account (and a checking account), other “cash equivalent” accounts are liquid. This is because they’re often short-term assets that are treated like cash. If you want to access them or pull your funds, it tends to be simpler, because there aren’t many additional layers of complexity. Cash equivalents include CDs (certificates of deposit), treasury bills, and money market funds. There are some exceptions, yet generally these accounts are easily accessible. 

Illiquid assets are assets that are more difficult to convert to cash. This can include assets that you have to sell, like precious metals, as well as assets like qualified plans that lock your money away until you reach a certain age. On the one hand, assets that you have to sell can be liquid if the market is right and there are plenty of buyers. Yet, timing the market is impossible in an emergency or opportunity—it happens when it happens. 

Qualified plans, on the other hand, can be accessed before you reach the right age. Yet that often comes with steep penalties and taxes. It works in a pinch, yet not with any efficiency.

Our favorite liquid asset is whole life insurance. You can get your money whenever you want it, and for any reason, without having to jump through hoops. 

Is Life Insurance a Liquid Asset? What Does Liquidity Refer to in a Life Insurance Policy?

When we talk about life insurance and liquidity, we’re talking about whole life insurance, thanks to the cash value component. As great as term insurance can be for reaching your Human Life Value, it doesn’t have any cash component to speak of. However, whole life insurance does, and it’s incredibly liquid. 

So, what does liquidity refer to in a life insurance policy? It’s all about the ability to take a policy loan against your cash value. When you buy whole life insurance, your premiums contribute to what’s called a cash value account. This grows over your lifetime, and is kind of like home equity: it builds as you make payments, relative to the value of the asset. In this case, the value of the asset is your death benefit. 

To access your cash value, you have the option to take a policy loan. This is money that the insurance company loans you against the amount of your cash value. It’s NOT a withdrawal. And the reason we like this is because it allows you to get the use of your cash value without reducing it, which means that you continue to earn interest and dividends on the full value of your account. This is great for compounding. Then, rather than trying to play catch up by putting money back into your cash value (which you can’t do anyway), you’re simply repaying a loan to the insurance company.

The reason this is considered liquid is because, unlike loans from other institutions, there’s nothing you have to qualify for. There’s no application, no questions to answer, and you don’t have to justify yourself. As long as you have the cash value to support it, the insurance company is happy to finance it. This makes it great in times of urgency, either for emergencies or opportunities. And often, you can get those funds directly deposited into your account in less than a week. 

Learn More About the Benefits of Whole Life Insurance

If the idea of whole life insurance intrigues you, and yet you’re not quite ready to make the leap, give our 1% Webinar a watch. You’ll find out how America’s wealthiest have used life insurance for centuries to weather emergencies and partake in opportunities. The best part is that you don’t have to BE in the 1% to take advantage of these strategies. They’re accessible to all and have actually been a part of many “rags to riches” stories. 
Questions? Email us at welcome@prosperitythinkers.com.