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A permanent life insurance policy’s cash value component offers policyholders a wealth-building feature. Permanent life policies combine a death benefit with a savings component that can earn interest on a tax-deferred basis.1 Policyholders can eventually tap into this cash value as a source of wealth. However, different life insurance policies may vary in their liquidity. This article will explain how liquidity in life insurance works across several policy types, including how you can access funds from your policy.
Liquidity in life insurance refers to the policyholder’s ability to access their policy’s cash value.2 Insurers may require the cash value to reach a minimum amount before you can access it. Once your cash value is at the set amount, the policy has liquidity.
Any life insurance policy with cash value can be considered a liquid asset once the cash value component grows to the point that you can access it.2 This is because you can typically receive funds from your policy quickly and easily. On the other hand, term life insurance policies are generally not liquid assets since they lack cash value.
Several life insurance policies offer liquidity:2
Whole life insurance lasts for life and offers a cash value that grows at a fixed rate. The rate is typically low, but the insurer guarantees it, insulating your cash value from market risk. Therefore, this type of policy may take longer to become liquid, but it helps maintain your earnings despite external economic conditions.
Universal life insurance is another permanent policy type, offering lifelong coverage and liquidity through cash value. Unlike whole life insurance, universal life insurance lets you raise the death benefit by paying more in premiums or reduce premiums in exchange for a smaller death benefit.
Variable life insurance typically offers lifelong coverage, like other permanent policies. However, you can invest the cash value into separate sub-accounts, such as stocks, bonds, and mutual funds.3 This allows you to potentially enjoy more growth, providing more cash value that you can access. However, your investments can lose value, risking losses in your cash value. If the cash value shrinks too much, your policy could lapse. Therefore, variable life insurance may work well if you’re willing to take on more risk.
Final expense insurance is a small whole life policy that helps cover funeral expenses, medical bills, and other end-of-life costs. It typically has a small death benefit but low premiums and no medical exam requirement. The cash value works the same way as whole life insurance. However, it may take longer to become liquid since the smaller premium payments lead to slower cash value growth. Furthermore, you may have to wait longer before you have substantial funds in the policy.
Don’t wait until it’s too late. Help cover yourself and your family with coverage from Aflac.
Here are some examples of liquidity in life insurance:
Policy loans let you borrow against your cash value without a credit check since the policy secures the loan. These loans usually offer low rates and no definite repayment. Plus, they’re generally not taxable if smaller than the total amount of premiums paid.4 As a result, these could be good options if you want cash quickly without worrying about taxes, such as if you need to cover unexpected expenses or want to refinance debt. However, if the loan grows too large through the accumulation of unpaid interest, the death benefit may decrease, and the policy could lapse. So, diligent management of your loan is crucial.
Withdrawing from your cash value can allow you to receive funds without interest or a repayment requirement. However, keep in mind that withdrawals can reduce the policy’s death benefit.
Withdrawals may be tax-free up to the total premiums paid into the policy. However, withdrawing gains, such as interest earnings or gains on investment sales in a variable life insurance policy, may be taxed as ordinary income.5 Overall, this may be a good option if your coverage needs decrease later and you need larger amounts of funds for significant expenses, such as college costs.
If you surrender your life insurance policy, you’ll terminate the policy and can receive the accumulated cash value. Surrender charges may apply, reducing your payout, but these fees decrease over time and may not apply after several years. Therefore, surrendering your policy may work well if you no longer need coverage and have other needs, such as paying significant debt or funding a business venture.
Life insurance with liquidity isn’t for everyone. Here are some situations where it may make sense for you:
Life insurance with liquidity can help your policy function as both a safety net for loved ones and a wealth-building option. From taking out policy loans to withdrawing funds, there are plenty of ways to access your policy’s cash value.
If you’re looking for life insurance with customizable coverage and competitive premiums, Aflac has you covered. Speak with an agent today to learn more and get a quote.
1Investopedia – Permanent Life Insurance: Definition, Types, and Difference from Term Life. Updated June 21, 2023. https://www.investopedia.com/terms/p/permanentlife.asp. Accessed June 20, 2024.
2Policygenius - What does liquidity refer to in a life insurance policy? Updated January 3, 2024. https://www.policygenius.com/life-insurance/what-does-liquidity-refer-to-in-a-life-insurance-policy/. Accessed June 20, 2024.
3Forbes – What is Variable Life Insurance? Updated June 1, 2023. https://www.forbes.com/advisor/life-insurance/variable-life-insurance/. Accessed June 20, 2024.
4Investopedia - What Are the Tax Implications of a Life Insurance Policy Loan? Updated December 18, 2022. https://www.investopedia.com/ask/answers/111714/what-are-tax-implications-life-insurance-policy-loan.asp. Accessed June 20, 2024.
5MarketWatch - Is Cash Value Life Insurance Taxable? | 2024 Guide. Updated April 13, 2024. https://www.marketwatch.com/guides/life-insurance/cash-value-life-insurance-taxable/. Accessed June 20, 2024.
Content within this article is provided for general informational purposes and is not provided as tax, legal, health, or financial advice for any person or for any specific situation. Employers, employees, and other individuals should contact their own advisers about their situations. For complete details, including availability and costs of Aflac insurance, please contact your local Aflac agent.
Aflac coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, Aflac coverage is underwritten by American Family Life Assurance Company of New York.
68000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. 65000 series: In Virginia, Policies ICC0965JTO & ICC0965JWO. B61000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC18B61JWO & ICC18B61JTO. In Delaware, Policies B61JWO, B61JTO. B60000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Q60000 series/Whole: In Arkansas & Delaware, Policy Q60100M. In Idaho, Policy Q60100MID. In Oklahoma, Policy Q60100MOK. Not available in Virginia. Q60000 series/Term: In Delaware, Policies Q60200CM. In Arkansas, Idaho, Oklahoma, Policies ICC18Q60200C, ICC18Q60300C, ICC18Q60400C. Not available in Virginia.
Final Expense insurance coverage is underwritten by Tier One Insurance Company. In California, Tier One Insurance Company does business as Tier One Life Insurance Company (Tier One NAIC 92908).
In AR, AZ, ID, OK, OR, PA, TX and VA: Policies ICC21-AFLLBL21 and ICC21-AFLRPL21; and Riders ICC21-AFLABR22, ICC21-AFLADB22, and ICC21-AFLCDR22.
Coverage may not be available in all states, including but not limited to DE, ID, NJ, NM, NY or VA. Benefits/premium rates may vary based on state and plan levels. Optional riders may be available at an additional cost. Policies and riders may also contain a waiting period. Refer to the exact policy and rider forms for benefit details, definitions, limitations, and exclusions.
Aflac’s family of insurers include Aflac, Aflac New York, Continental American Insurance Company, and Tier One Insurance Company.
Aflac WWHQ | Tier One Insurance | 1932 Wynnton Road | Columbus, GA 31999
Aflac New York | 22 Corporate Woods Boulevard, Suite 2 | Albany, NY 12211
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