How Life Insurance Can Help With Liquidity • Benzinga
As retirement approaches, many people are looking for ways to reduce their debt by liquidating their assets. One of the most valuable assets you can liquidate is your life insurance. Many whole life insurance policies create cash value over time and can be sold for a generous lump sum if necessary, and this is how life insurance can help with liquidity.
Life insurance is more than a benefit used to pay for your final expenses. It can also be an innovative investment tool designed to help you overcome financial difficulties during your lifetime. Here’s how to take advantage of 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 purchase the life insurance of your choice. However, it is essential to consider the different policies and how you can benefit from them based on your unique situation. The variations of life insurance allow everyone to find a contract that meets their last wishes, their beneficiaries and their current needs, while respecting 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 some drawbacks come with term life insurance.
You can choose a term life insurance policy that lasts 5, 10, or even 30 years. But once that time is up, so is your policy. Most companies offer the option of renewing coverage, but it’s usually at a much higher rate. Some providers allow you to convert your term life insurance to a permanent or whole life insurance policy after the period is over.
Term life insurance does not create cash value over time. Its main purpose is to pay off the last expenses and other debts that the deceased may have accumulated over the years.
Complementary life insurance
Supplemental life insurance is another good option, as it covers expenses that are usually not covered by traditional life insurance policies. This form of coverage is also called voluntary life insurance. It is often used to fill gaps in coverage left by a group policy provided by an employer.
According to statistics from the Life Insurance and Market Research Association, about 27% of people who have life insurance only have one policy through their employer instead of a private policy. These group term life insurance policies can provide coverage up to a certain amount, which can be useful. Still, most experts will suggest that you have an additional policy to ensure adequate coverage and benefits for your beneficiaries.
This is where supplemental life insurance policies come in handy. You can buy them to supplement your current group life insurance policy, and they can be taken with you if you ever decide to change jobs.
Global or whole life insurance
Whole or whole life insurance is the most expensive life insurance option, but it can also be the most valuable. When looking for liquidity options, these policies have the added benefit of a cash value. Building a cash value means that a portion of each premium payment is placed in a savings account. This money earns interest over time or can be borrowed to reap the benefits during your lifetime. Even though whole life insurance costs more, those with a policy accept the higher premiums in exchange for the additional liquidity offered by the cash value.
The liquidity of global or whole life insurance makes this type of contract a valuable asset because your financial situation will change and evolve. Suppose you bought a whole life insurance policy when you were younger. You would have the benefit of borrowing against your cash value for important life events such as buying a new car, unforeseen family expenses, or funding retirement.
What is overfunding?
Another advantage of whole life insurance policies is overfunding. It is a practice where the policyholder pays more than the actual amount of his premium requires. Typically, you have to pay a specific amount each year or each 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, allowing the cash value to accumulate. Over-funding is an option available only under permanent, comprehensive or lifetime policies.
Overfunding is one of the best ways to increase the liquidity of your assets. With this process, the cash value of the policy is accelerated, allowing it to continue to increase in value much more than it was originally worth when you bought it. By overcapitalizing, the policyholder has more money in their policy that they can access at any time.
While the policy retains all of its original value that would pay your beneficiaries at the time of your death, you still have access to the cash value and additional cash while you are alive.
Investing in life insurance for liquidity
There are many investment options available for those who want to save money for retirement. Unfortunately, most involve risk factors that could cause you to lose more than you gain. When you have a comprehensive, permanent, or whole life insurance policy with cash value, it gives you a safe and easy 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 cash flow is a great option.
If you have extra cash to invest and are looking for a better way to diversify your funds, it would be wise to allocate some of it to retirement funding using the cash value of your whole life insurance.
Using life insurance cash for retirement
Once you have extra cash in your whole life insurance policy, you have an extra layer of security when life takes an expected or unexpected turn. We already see our life insurance policies as a safety net for our children or grandchildren. Why not take these benefits one step further and use the funds to help you retire as well? You can buy life insurance now knowing that it will help you with cash flow down the road.
Best Life Insurance Companies
Maybe you started saving for your retirement later in life and are now worried about your financial future. Using your whole life policy as a liquid asset can help you 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 protect your family’s future and have extra cash to use when needed. Benzinga’s list of the best life insurance companies can help you find the right insurer and use your life insurance to increase your cash flow.
Frequently Asked Questions
Is a life insurance contract a liquid asset?
Is a life insurance contract a liquid asset?
Yes, but only a global or permanent contract with surrender value can be used as liquidity. You cannot use a term life insurance policy for this purpose. Term life insurance has no cash value and has an expiration date. The sole purpose of a term life insurance policy is to pay final expenses, unreconciled debts and benefits to the deceased’s heirs. This is why premiums for term life insurance are cheaper than premiums for permanent or whole life.
How is whole life insurance liquid?
How is whole life insurance liquid?
Whole life insurance policies are liquid assets because the money you overfund is invested. This extra cash gains value over time. Think of your insurance company as a large investment firm that pays for insurance policies while simultaneously providing you with a simple savings account. This is why life insurance helps to increase liquidity.
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