What Is Liquidity in Life Insurance?

Rebecca Parson
Rebecca Parson

Rebecca Parson


Rebecca Parson is a financial and tech writer with 10 years of experience writing about topics such as life insurance, commodities investing, and the SaaS industry. She has a master’s degree from Johns Hopkins University and a bachelor’s degree from the University of Mary Washington. Her writing has appeared at money.com, sacbee.com, cart.com, herodevs.com, blanchardgold.com, and more.

Brian OConnel
Brian OConnel

Brian O'Connel


Brian O’Connell has been a contributing writer for U.S News & World Report since 2016. A former Wall Street bond trader and the author of two best-selling books; “The 401k Millionaire” and “CNBC’s Creating Wealth”, he has 20 years experience covering business news and trends, particularly in the business and financial sectors. He believes education is the best gift a financial consumer can receive – and brings that philosophy to every story he writes. His byline has appeared in dozens of top-tier national business publications, including CBS News, Bloomberg, Time, MSN Money, The Wall Street Journal, CNBC, TheStreet.com, Yahoo Finance, CBS Marketwatch, and many more.

By Rebecca Parson, Brian O'Connel
Author, Contributor, Life Insurance

Liquidity in life insurance refers to how easily you can access the cash in your life insurance policy. You can think of any life insurance policy with cash value, like whole life and universal life, as a liquid asset.

Examples of Liquidity in Life Insurance

Examples of liquidity in life insurance include:

  • Loan Against the Cash Value: You can borrow against the cash value of your permanent life insurance policy if it has accumulated enough value. This lets you bypass the usual loan approval process and avoid a fixed repayment schedule. However, borrowing too much could risk policy lapse.
  • Policy Surrender: Surrendering your policy to your insurer ends your coverage permanently in exchange for the cash value or a part of it.
  • Using Your Policy as Collateral: Life insurance policies can serve as collateral for traditional bank loans.
  • Life Settlement: A life settlement involves selling your life insurance policy to a third party for a lump sum payment. This option can provide significant liquidity, usually exceeding the policy’s cash surrender value, especially for seniors or people with declining health.

Additional Uses of Life Insurance Liquidity

The death benefit of a life insurance policy is a liquid asset, which beneficiaries can use for any purpose. And unlike fixed assets that must be sold before they’re turned into cash, a death benefit is a liquid inheritance. This is why many people decide to buy life insurance.

Life insurance also provides businesses with capital to handle the financial impact of losing a key person. It helps cover revenue loss and the cost of recruiting a replacement and provides funds for buy-sell agreements.

Does a Term Life Insurance Policy Have Liquidity?

No, a term life insurance policy doesn’t have liquidity because it doesn’t have cash value. You may be able to convert your term life policy into a permanent policy, however, which would give you cash value liquidity.

How Taxes Work With Liquidity in Life Insurance Policies

The policy owner accumulates tax-free interest on their cash value, which can be accessed through withdrawals or loans for any reason. When withdrawing funds, the principal is taken out first and remains untaxed. Loans also aren’t taxable, but unpaid loans reduce the death benefit. 

Beneficiaries don’t pay taxes on the death benefit they receive.

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