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Is Life Insurance Considered an Asset?
Is life insurance considered an asset? The answer is, in many cases, yes. We’ll explain what policy types build wealth for your lifetime and which ones only add to your estate.
What Is an Asset?
It can be hard to keep track of financial terminology - we get it! So let's get started by defining what an “asset” is. An asset is something that has monetary value, either tangible, intangible, or financial. Tangible assets are physical items you possess and are able to sell in exchange for money, such as cars, jewelry, or artwork. Intangible assets are also things you own and can sell for money, but they aren't physical items. Copyright or intellectual property are examples of intangible assets. Financial assets include cash, stocks, bonds, retirement accounts, and the cash value portion of permanent life insurance policies.
So…is life insurance considered an asset? The answer is yes, but only the cash value portion of permanent coverage.
What Is Permanent Life Insurance?
Permanent life insurance is coverage that lasts your entire lifetime, with a guaranteed death benefit that will be paid no matter when you die (as long as you pay your premiums).
In addition to the face value of the death benefit, permanent policies also have a cash value savings component. This component of your policy accumulates wealth and can be accessed during your lifetime. Your growth is also tax-deferred. Permanent coverage is more expensive than term options, but you get guaranteed protection for your entire lifetime and cash value growth.
A portion of every premium you pay goes into growing your cash fund. You can choose to pay more than your required premiums in order to grow your cash fund faster, too.
There are several kinds of permanent life insurance:
Whole Life: Like all permanent coverage, whole life includes a death benefit value as well as a cash savings component that grows over your lifetime. Traditional whole life policies grow at a predetermined rate set by your insurer, ensuring predictability. It is the most popular type of permanent coverage – and it’s the least complicated.
Universal Life: This policy allows you to adjust your premium payments and death benefit amount to fit your needs. For example, if you want to decrease your payments, your insurer will pull the difference from your cash value to make up the difference. The most popular is indexed universal life (IUL), which accumulates cash value at a fluctuating rate based on an investment index set by your insurer, such as the S&P 500. This gives you the opportunity for more growth, and there's typically a guaranteed minimum to ensure you do not lose money. There may also be set maximums depending on your contract. There is a higher potential for growth, but your earnings will not be consistent and you may have to pay high management fees on your gains.
Variable Life: While these policies do accumulate cash value, it is based on investments selected by your insurer. If the funds invested in do well, you grow your cash value faster. However, there is no guaranteed return. For this reason, we rarely recommend variable life policies.
Want some personalized advice? We get it – that’s why we studied so hard to become licensed agents! Call us at (800)521-7873 and let us help you sort it all out!
Is Life Insurance Considered an Asset?
The life insurance death benefit is not considered an asset because it is not yours to distribute or sell during your lifetime.
However: The death benefit does contribute to your estate, which is the sum of all your land, real estate, possessions, financial securities, cash, and other assets. You can name one or more beneficiaries and specify the percentage of the death benefit you want left to each beneficiary.
The cash value accumulated in a permanent life insurance policy is considered an asset.
How it works: Growing on a tax deferred basis, a portion of the premiums you pay goes towards the cash fund that earns compounded interest. This fund can be used to supplement your retirement, pay for education for your children, cover medical expenses, and more. If the value goes unused while you are alive, it can sometimes be passed on to your beneficiaries with the death benefit of your policy. That depends on your insurer - some will charge more for this option, while others won't offer it at all.
Read more about how permanent life insurance is an asset here.
But permanent life insurance isn't the only kind available. So what about term life?
Term life insurance is a temporary policy that lasts for lengths of 5, 10, 15, and 20 years. Other term lengths do exist, depending on your insurer - some now go as long as 40 years. These policies are significantly cheaper than permanent policies, with the same death benefit value. They're cheaper because they don't accumulate cash growth. The downside? You may outlive your term and have to reapply at higher rates, due to your older age and any new health conditions.
While term coverage is not an asset, it can add to your estate - and at a lower cost, to leave more behind for your heirs. One thing to consider? Click here to find out what happens to term life insurance if you don't die.
Is The Life Insurance Death Benefit Part of Your Estate?
Life insurance can be used to create an immediate estate or aid in estate planning you’ve already begun.
In addition to being used to create an immediate estate, your death benefit can help your heirs pay estate tax, and help you divide assets equitably among those heirs. When you purchase insurance, you can name one or more beneficiaries and specify what percentage of the total death benefit you want them to receive. For example, you can split the death benefit between:
- A spouse
- Children
- Grandchildren
- An institute or charity, to leave behind a legacy to an alma mater or a worthy cause
When you pass away, your beneficiaries will need to file a claim. When it's approved, your insurer will pay the death benefit income-tax-free. It's a straightforward transaction that cannot be held up by probate or be subject to debt collectors.
The money left behind can be used for anything – paying off medical bills or funeral costs left behind, college tuition, mortgage payments, or just paying for regular bills to replace the lost income or take time off work to grieve. There are no restrictions to what the death benefit money can be used for.
If you have a high net worth, your heirs may need to pay an estate tax in order to inherit. Life insurance can help avoid this by providing them with an income-tax-free cash payout to cover any estate tax due. This will help ensure they do not need to sell any assets like a home, artwork, jewelry, cars, or other property.
If you own a business, property, farm, or other assets that are difficult to divide equitably between your heirs, life insurance can help. You can buy a policy with a face value equal to the value of an asset (or a portion of the asset) to leave the heirs who do not inherit the physical asset. For example, if you have three children and own a small business worth $2,000,000, you may only have two children who want to take ownership once you’re gone. To give all of your children an equal share, you may buy a policy worth $1,000,000 to go to your third child so they each receive an equal inheritance.
Summary
Life insurance can contribute to your estate, and permanent insurance can add to your assets through cash value accumulation. There are several kinds of permanent life insurance that you can shop from to protect your loved ones and to build your financial portfolio during your lifetime. Life insurance should be a key element in any financial strategy to build wealth for your lifetime and beyond. Want to learn more or get a quote? You can do so here on our website, or give us a call at (800)521-7873. Tell us what your financial goals are, and we’ll find the insurance solution to achieve them!
