Co-Founder, Coastal Financial Partners Group, California
Liquidity in life insurance generally refers to the cash value in permanent life insurance. While the primary reason to have life insurance is the income tax free death benefit, the living benefits of ownership derive from its cash value. The owner can partially withdraw or borrow cash values while continuing the policy or the owner can surrender the policy entirely and receive its cash surrender value. Any gain in the policy would be taxable as income to the owner.
Permanent life insurance policies can accumulate cash values for liquidity purposes. Depending on the type of policy and when you’re attempting to liquidate cash values, will determine if you have liquidity.
Liquidity is in the eye of the beholder. How much liquidity is necessary, only the policy owner can define? That being said, be advised, that non modified endowment contract policy loans may have a price tag. Policy loans provisions can charge from zero to 400 basis points depending upon what life insurance policy you own. But you need to be careful about taking withdrawals of basis in the first 15 years of a policy that has gain in the policy. Certain policies are subject to the “force out” rule and can actually expose the policy owner to a taxable event.
The first step is to order an in force ledger to determine the total cash value less surrender charges and policy expenses. Then then have the life insurance company predetermine if access to cash values can be achieved without a taxable event. Keep in mind that the contract must be kept in force for the life of the insured (not the policy owner) or a taxable event could occur.
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Liquidity is in the eye of the beholder. How much liquidity is necessary, only the policy owner can define? That being said, be advised, that non modified endowment contract policy loans may have a price tag. Policy loans provisions can charge from zero to 400 basis points depending upon what life insurance policy you own. But you need to be careful about taking withdrawals of basis in the first 15 years of a policy that has gain in the policy. Certain policies are subject to the “force out” rule and can actually expose the policy owner to a taxable event.
The first step is to order an in force ledger to determine the total cash value less surrender charges and policy expenses. Then then have the life insurance company predetermine if access to cash values can be achieved without a taxable event. Keep in mind that the contract must be kept in force for the life of the insured (not the policy owner) or a taxable event could occur.