Life insurance is a financial tool that provides your family with money after you die. You may also use life insurance to provide you with living benefits. These types of policies are permanent life insurance policies. The policies have their own set of rules, but they may provide you with liquid assets for a business or for individual use.
The types of permanent policies available are whole life insurance, variable life and universal life. Permanent life insurance, as distinguished from term life insurance, is designed to provide death benefit coverage at age 100 or age 120, depending on the specific contract. Both whole life and variable life are designed to build cash value over time. Universal life may or may not build cash value because universal life insurance provides for flexible premium payments. These flexible premium payments may allow the insurer to invest most of the premium payment or you may structure the payments to be so low that it leaves little or nothing extra for the insurer to invest. If too little is left to invest, then little or no cash value will accumulate in the policy. Alternatively, internal policy costs may deplete the cash value rapidly in a universal life policy, leaving little or no cash value in the policy. Under these circumstances, the insurer may offer a guarantee of death benefit coverage regardless of the cash value in the policy provided that you pay a set minimum premium payment.
When funding a life insurance policy, premium dollars that are not used to support the cost of insurance are invested. This invested amount builds a cash value. These "cash value" life insurance policies act as a savings. Any money in the cash value account is considered a liquid asset for business purposes, but may also be a personal asset when doing estate planning.
The benefit of having life insurance as a liquid asset is that the cash value in the account are generally not taxed. No tax is paid on the policy's cash value in the account. Additionally, no tax is paid when you withdraw money from the account as long as withdrawals are less than your basis (the total amount of premium you've paid to the policy). Policy loans are tax-free as long as the policy remains in force.
The disadvantage to having life insurance as a liquid asset is that the cash value does not build up quickly. It is normal for the cash value to be less than the total premiums paid for the first 10 years of the policy. Beyond this point, policy cash value growth begins. However, life insurance is meant to be held for 20 or more years. This means that your policy will only function as a long-term asset. If you need funds in the short-term, you won't have the liquidity you require.
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- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
- "Life & Health Insurance, License Exam Manual, 6th Edition"; Dearborn Financial; 2004