What does Liquidity Refer to in a Life Insurance Policy?

By | December 10, 2021

Understanding Liquidity:

Before entering the main discussion let understand the term “Liquidity”. Liquidity is the measurement or degree by which any asset can purchase or bring with its current market price that closely reflects on its value. Cash is the most significant liquid asset, cash is worldwide accepted and it can easily and quickly use to purchase or sold any other assets. You can see some Tangible assets as illiquid, Real Estate, Fine Art, Collectibles, etc. are illiquid.

For example, if you want to sell one bookshelf with the price of $500, that case, cash is the most important liquid which can help to get your things.  On the other hand, if any person has an extra refrigerator whose price is $500, and if he/she needs a bookshelf, so the second customer never will find you to offer his/her refrigerator instead of your bookshelf. Instead of doing this, he/she will find one customer to sell the refrigerator in terms of the cash amount. And finally, he/she will give that money and purchase your bookshelf.  So here cash is the liquid amount, by which any trade can instantly start or finish off. And the bookshelf or the refrigerator which can take weeks to months to trade-off is an example of Illiquid assets.

What does liquidity refer to in a life insurance policy?

Life insurance has the main objective to assure financial security for the family person in the event of the death of the policyholder. But this insurance also can be used in different ways. This insurance offers a great value of liquidity on several specific situations (life and business situations) at the time when the user badly needs to access capital.

Life insurance starts with the aim to pay the death benefits upon the death of the policyholder. But the insurer against this takes a fixed premium with set interest rates per month or annually from the user. However, in the case of permanent life coverage, the insurer also offers the cash value (the premium portion, which is not for covering the premium of the coverage). This cash value is tax-free and can use for any purpose. Either as a direct withdrawal, Policy Loans or as the Tax-Free death value in-call cases this cash value can reach the owner. The direct withdrawal of this cash value does not need to pay any tax. Hence, it gives some money to the policyholder before he/she dies. The policy loan also is tax-free, but it needs to be repaid. If it is remaining not repaid, it impacts the death value’s amount and makes the amount smaller.

However, the final option, which is death benefits also is tax-free but does not reach the policyholder. Instead, it goes to the family members of the policyholder.

So upon the analysis of the cash amount or the death benefits of the life coverage we see that this insurance covers a Cost-Effective Liquidity (whether for the policyholder or for the beneficiaries) in both the individual and in business aspects.

 Life Insurance Serves Immediate Liquid cash to the Survivor:

When the main earner of any family dies, the remaining family members who are alive fall into a great financial crisis at that time. The survivor may have an asset in their home, may have the retirement plan of the dead breadwinner, or might have other running businesses as well. But without any other direct source for the cash capital, it becomes very tough to survive. Besides this, the dead breadwinner may keep some larger debts which also could attack the live family person very deeply.  In all these scenarios, life insurance serves as the lifesaver for each family person. It provides instant liquidity which could be enough to meet any sort of requirements for the family member which in further could prevent to sell the permanent assets of the dead breadwinner.

 

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