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Is Cash Value of Life Insurance a Liquid Asset?
Is cash value of life insurance a liquid asset? A liquid asset is something you can exchange for cash, such as stocks or bonds. That means cash value qualifies – and we’ll explain how it grows, as well as how you can access that cash value.
What Is Cash Value?
Every permanent life insurance policy has a cash value account attached to it.
Keep in mind that term life does not have cash value – it’s a completely separate type of coverage. Your cash value gets funded with a portion of every payment you make.
First, the insurer deducts the cost of your coverage from that payment, along with any periodic account maintenance fees. The amount left over gets put into your cash value account.
Your insurer will also credit that account with periodic interest payments. These may be credited annually or semi-annually, depending on your insurer and policy.
Different policy types have different interest rate crediting strategies:
- Whole life. The interest rate is guaranteed, fixed, and set when you buy your policy.
- Universal life. The interest rate varies periodically to reflect prevailing rates.
- Indexed universal life. You can choose a market index to tie your interest rate to. When the index does well, you will earn more interest. When the index loses value, you will earn less interest, or possibly zero interest. Every insurer will set their own rules and rates. If you shop with us at LifeQuote, we’ll help you find the policy with the highest rates and best benefits.
Over time, your cash value account will grow tax-deferred. You can access that liquid cash in several ways, which we’ll go over below.
Is cash value of life insurance a liquid asset? Yes! Call us at (800) 521-7873 and let us answer them one-on-one! Or click the button below to get started with a free quote.
Ways to Access Cash Value
As your cash value grows, you may start thinking of things you can do with that money. Here’s how to access your policy’s cash value:
- Policy payments. Your insurer can make your premium payments for you, pulling from your cash value. It will be up to you, however, to make sure you always have enough in the account to make those payments, plus cover the required minimum your insurer requires to keep the policy in force.
- Policy loan. Borrow against your cash value with a private loan from your insurer. You’ll be charged interest for this loan, but it will be partially offset by the interest your cash value continues to earn. If you don’t pay back a loan, the insurer will deduct any amount you owe from the death benefit before they pay it out to your beneficiary. It’s up to you to weight the pros and cons of paying a loan back (and not accruing any more interest) versus leaving it outstanding (and reducing the amount your beneficiary will receive).
- Partial withdrawal. You can also withdraw money in what’s called a “partial surrender.” Your insurer will probably charge a fee for this type of withdrawal, but since it’s not a policy loan, there is no interest and no further charges. It’s a one-and-done kind of transaction. Keep in mind that you’re reducing the overall level of your cash value, so you’ll earn less interest after a withdrawal.
- Surrender value. If you cancel your policy, you are entitled to take the policy’s cash value with you (minus any outstanding loans, fees, etc.). However, we don’t encourage anyone to cancel a policy unless your beneficiaries no longer need the death benefit. But if that should be the case, you can keep your policy’s cash value as long as you cancel your policy the correct way, by informing your insurer and filling out any required paperwork.
Because cash value grows tax-deferred, you only have to pay income tax if you pull out more in cash value than you’ve paid in premiums since you bought your policy.
Have more questions about cash value life insurance? Call us at (800) 521-7873 and let us answer them one-on-one! Or click the button below to get started with a free quote.
Is Cash Value of Life Insurance a Liquid Asset?
Yes. Because you have the ability to access it in the form of cash, it is a liquid asset.
- Spend the cash any way you want. There are no restrictions from the insurance company, so let your imagination run wild! We’ve had clients use cash value for retirement income, home renovations, helping kids through college, or taking the trip of a lifetime to check off a bucket list item.
- Use it as collateral. You can use your life insurance as collateral for a traditional loan from a bank.
- Add it to the death benefit. Some insurers will let you roll your cash value into the death benefit so, even if you don’t use it, your loved ones can.
- Ignore it for your child’s FAFSA. One great thing about cash value? Although it’s a liquid asset, it doesn’t need to be included on the FAFSA application when your child is applying for student aid for college.
Have more questions about permanent life insurance? Call us at (800) 521-7873 and let us answer them one-on-one! Or click the button below to get started with a free quote.
Overfunding Your Account
There’s one additional financial strategy available to anyone with a permanent policy, although it’s most often used with whole life. If you’ve heard people asking, “Is cash value of life insurance a liquid asset?”, it’s often to do with this particular strategy.
After the first seven years you own the policy, you can pay more than the required minimum, which adds more money to your cash value. The caveat? You cannot overfund your policy in those first seven years or it will cause the IRS to reclassify your account and it will lose the benefit of tax-deferred growth!
The overfunding strategy helps your cash value grow even faster, earning more interest. Some high-net-worth clients use this strategy to grow cash value specifically so they can borrow against it for things like business ventures and other investments. We recommend talking with tax and financial professionals to get customized advice if you want to pursue this strategy.
Have more questions about cash value or permanent life insurance? Call us at (800) 521-7873 and let us answer them one-on-one! Or click the button below to get started with a free quote.
