Liquidity is an important concept that applies to life insurance policies. In general, liquidity can refer to a variety of different aspects of insurance policies, but it is most commonly used to describe the amount of money that a person may receive when they surrender their policy or the amount of cash they will have access to through a life insurance policy loan. Both types of liquidity involve the ability to easily obtain cash.
When an individual surrenders their life insurance policy for cash, the amount of money that they will receive is known as the surrender value. Surrender values are lower than the face value of the policy, as this type of liquidity offers the insurer the ability to convert a policy into cash quickly by providing the insured with a reduced amount of money in return.
A policy loan is another form of liquidity that many people choose to use when it comes to their life insurance policies. This type of loan provides the insured with a lump sum amount of money in exchange for collateral that is held by the insurer, such as a piece of property, a car, or other assets. While these loans allow for immediate access to cash, policy loans are considered to be secured loans, meaning that if the insured fails to make payments according to the agreed-upon schedule, the collateral could be seized by the insurer in order to pay off the remaining balance of the loan.
To summarize, liquidity refers to the amount of money a person can access through surrendering their policy for cash or through a policy loan. Surrender value is the amount of cash a person will receive when they surrender their policy and policy loan is an option that allows people to obtain money through collateral offered to the insurer. It is important to understand the various aspects of liquidity in order to make an informed decision when it comes to life insurance policies.