When nearing retirement, many people look for ways to decrease their debt by liquidating their assets. One of the most valuable holdings you can liquify is your life insurance. Many whole-life policies build cash value over time and may be sold for a generous lump sum when necessary, and this is how life insurance can help with liquidity.
Life insurance is more than a benefit used to pay your final expenses. It can also be an innovative investment tool designed to help with financial struggles while you are living. Here’s how to benefit from your life insurance policy.
What Type of Life Insurance Do You Need?
You can choose from many types of life insurance policies. And you are free to get any life insurance you choose. However, it’s essential to consider the different policies and how you can benefit from them based on your unique situation. The variations of life insurance make it possible for anyone to find a policy that takes care of their final wishes, beneficiaries and current needs, all while staying within their budget.
Term Life Insurance
Term life insurance is the most affordable option for those who want to stay protected without spending too much money on a policy. But a few downsides come with term life insurance.
You can choose a term life policy that lasts 5, 10 or even 30 years. But once that time is up, so is your policy. Most companies provide the option to renew coverage, but it is usually at a much higher rate. Some providers allow you to convert your term life into a permanent or whole life policy once the period ends.
Term life insurance does not build cash value over time. Its primary purpose is to pay for the final expenses and other debts the deceased may have accumulated over the years.
Supplemental Life Insurance
Supplemental life insurance is another good option because it pays for expenses not usually covered by traditional life insurance policies. This form of coverage is also referred to as voluntary life insurance. It is often used to bridge the gaps in coverage left by a group policy provided by an employer.
Based on Life Insurance and Market Research Association statistics, around 27% of people who have life insurance only have a policy through their employer instead of a private policy. These group term life insurance policies can offer coverage up to a specific amount, which can be helpful. Still, most experts will suggest you have an additional policy to ensure adequate coverage and benefits for your beneficiaries.
That is where supplemental life insurance policies are useful. You can purchase them to complement your current group life policy, and they may be taken with you if you ever decide to change jobs.
Global or Whole Life Insurance
Global or whole life insurance is the most expensive life insurance option, but it can also be the most valuable. When you are looking for liquidity options, these policies have the added benefit of cash value. Building cash value means that a portion of every premium payment is placed into a savings account. This money either earns interest over time or can be borrowed to take advantage of the benefits while you are still living. Even though whole life insurance costs more, those who have a policy accept the higher premiums in return for the added liquidity the cash value offers.
The liquidity of global or whole life insurance makes this type of policy a valuable asset, as your financial situation will change and evolve. Suppose you purchase a whole life insurance policy when you are younger. You’d have the advantage of borrowing from your cash value for significant life events such as purchasing a new car, unexpected family expenses or retirement funding.
What is Overfunding?
Overfunding is another benefit of whole life insurance policies. It is a practice where the policyholder pays more than their actual premium amount requires. Generally, you must pay a specific amount each year or month when your premium is due to keep your policy in force.
However, with a policy that allows overfunding, you can pay more than the minimum amount required, permitting the cash value to accrue. Overfunding is an option only offered through permanent, global or whole life policies.
Overfunding is one of the best ways to increase the liquidity of your assets. With this process, the policy's cash value is accelerated, allowing it to continue rising in value much more than what it was initially worth when you purchased it. By overfunding, the policyholder has more money in their policy they can access at any time.
While the policy retains all its original value that would pay your beneficiaries at your time of death, you still have access to the extra cash value and liquidity while you are living.
Investing in Life Insurance for Liquidity
Many investment options exist for those who want to save money for retirement. Unfortunately, most involve risk factors that could lose you more than you gain. When you have a global, permanent or whole life insurance policy with a cash value, it provides you with a safe and straightforward way to invest for the future. If you are new to investing or like to keep your finances simple, using your life insurance policy for liquidity purposes is an excellent option.
If you have extra cash to invest and are looking for a better way to diversify your funds, it would be wise to assign some of it as retirement funding using your whole life insurance cash value.
Use Life Insurance Liquidity for Retirement
Once you have additional cash in your whole life insurance policy, you have an added layer of security for when life takes an expected or unexpected turn. We already think of our life insurance policies as a safety net for our children or grandchildren. Why not take those benefits one step further and use the funds to help with your retirement as well? You can buy into life insurance now knowing it will help with liquidity later.
Best Life Insurance Carriers
Perhaps you started saving for retirement later in life, and now you have concerns about your financial future. Using your whole life insurance policy as a liquid asset can help make the most of your golden years, even if you don’t have a retirement plan in place. Investing in a whole life insurance policy and overfunding it is a good way to help ensure your family’s future is protected and you have extra cash to use as needed. Benzinga’s list of the best life insurance carriers can help you find the right insurer and use your life insurance to increase liquidity.
- securely through Ladder Life Insurance's websiteBest For:Adjustable coverage
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers – for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products. Coverage amounts vary by state.
- securely through Haven Life Insurance's websiteBest For:Under Age 64
Haven Term is a Term Life Insurance Policy (ICC21 Haven Term in certain states, including NC) issued by C.M. Life Insurance Company (C.M. Life), Enfield, CT 06082. In New York (DTC-NY) and California (DTC-CA), it is issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001.
Frequently Asked Questions
Is a life insurance policy a liquid asset?
Yes, but only a global or permanent policy with cash value can be used as a liquid asset. You cannot use a term life insurance policy for this purpose. Term life insurance does not have any cash value, and it has an expiration date. The only purpose of a term life insurance policy is to pay for final expenses, unreconciled debts and benefits to the heirs of the deceased. That is why term life insurance premiums are less expensive than permanent or whole life premiums.
How is whole life insurance liquid?
Whole life insurance policies are liquid assets because the money you add by overfunding is invested. This additional cash accrues value over time. Think of your insurance company as a large investment company that pays out insurance policies while also providing you with a simple savings account simultaneously. That’s why life insurance helps increase liquidity.
Benzinga crafted a specific methodology to rank life insurance. To see a comprehensive breakdown of our methodology, please visit our Life Insurance Methodology page.