"Liquidity" refers to a person's or company's availability of cash. A highly liquid asset is one that can be turned into cash quickly and easily. Some life insurance policies, such as whole life or universal life, build equity as you pay premiums. The degree to which you can tap into this equity as you see fit is the liquidity of the insurance policy.
Cash Value and Liquidity
Whole life insurance policies build cash value that grows over time. These types of life insurance policies offer a way to save money and earn tax-sheltered interest. If the policy is offered by a mutual life insurance company, it may even pay dividends. Some whole life policies let you withdraw money or borrow on the cash value, although there may be restrictions. Policies that allow access to your equity in these ways are considered to be liquid.