Is Life Insurance a Liquid Asset?

While it's true that the main reason you have for buying a life insurance policy is for the income protection provided to survivors in the event of your death, there are actually a number of other uses for life insurance that you may not have considered. 

When facing the choice of what type of life policy is most appropriate for your needs there are two main options – permanent coverage, typically referred to as whole life insurance or temporary coverage, also called term insurance.

Each insurance type has its own pros and cons, with whole life carrying more expensive premium costs for a death benefit equal to that in a term life policy, but term life possesses no cash accumulation value similar to that of whole life. Generally speaking, term insurance is best suited to a young policyholder whose income is tight but who has a young family for whom he or she wants to provide income protection in case of an untimely death. With term coverage, you're able to get the most protection for the least amount of premium cost.

Benefits of Whole Life

While premium costs for whole life coverage is higher than the cost of a term policy with the same face value, whole life policies contain a cash value provision that slowly accumulates over time. Since a whole life policy is good for the life of the insured, as long as it's kept in force by maintaining current premium payments, as the years go by the cash value steadily increases in an account that is accessible to the policyholder. The insured can either borrow this money or, upon the decision to surrender the policy, totally cash out the accumulated amount. By definition, this makes your term life insurance policy a liquid asset. A side benefit of this cash accumulation is that it's not taxed as long as the policy is in force. Even when money from the account is borrowed, that money is also not taxed as long as the amount withdrawn is less than the total amount of premium that's been paid toward the policy.

What's a Liquid Asset?

A liquid asset is one that can easily be converted into cash with minimal impact on its value. The cash accumulation of your whole life policy falls within this definition. Since a term life policy has no cash accumulation provision it is not a liquid asset.