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Is Life Insurance Counted in Net Worth?
Is life insurance counted in net worth? As with most insurance questions, the answer is “it depends.” It depends on the type of coverage you have, for starters. Only one type of life insurance has a component that counts toward your overall net worth: permanent life insurance.
Permanent Life Insurance and Cash Value
The two main types of life insurance are permanent and term. Although term life is more affordable (and the most popular, as a result), it doesn’t have cash value – and that’s what helps you build your net worth. Permanent coverage lasts the rest of your life, unlike a term policy. Every permanent policy contains a cash value account, funded over time by money from your payments plus interest credited by your insurer. Different policy types accrue cash value in different ways – we’ll go over them below.
Your cash value is a true financial asset because it has monetary value. It’s real cash you can use for anything – starting a business, paying off a bill, sending a kid to college, or checking off a few bucket list items. Because it grows over time, it’s not something you can use to get rich quick. It needs time to build and grow. Think of it as a type of savings account that will come in handy later.
So, is life insurance counted in net worth? Your cash value is, yes. Keep in mind that you can’t count the face value of your policy in your net worth. That money isn’t realized until you pass away, and then it will be distributed to your chosen beneficiaries in the percentages you selected. Only cash value is considered an asset that contributes to your net worth.
Rather talk to a real person about life insurance? We get it – and we’re here to answer all your questions. Call us at (800) 521-7873 or click the button below to start comparison shopping with a free term life quote.
How Cash Value Grows: Types of Permanent Coverage
Not all cash value policies are created equal. They each accrue interest in different ways, some with more risk than others. If you’re not sure which type is right for you, we can help you figure it out.
- Whole life. The simplest type of permanent coverage – it earns interest at a set, guaranteed rate that’s fixed when you buy the policy. You’ll always know what you’re going to have, and there’s no risk because that rate will never change. Some retirement strategists like whole life because of that safe, guaranteed rate. You can access that cash to invest in other opportunities, enabling you to act as your own banker. When people online ask “is life insurance counted in net worth,” they’re often looking for details about this form of using cash value.
- Universal life. More flexibility in payment amounts, payment dates, and interest rate. Your insurer will update the rate periodically to reflect the prevailing rates administered by the Federal Reserve. When rates are high, you’ll earn more. But when rates drop, your rate will, too. That makes it harder to predict exactly how much cash value you’ll have in, say, 10 years. But if interest rates rise, you have the chance to earn more.
- Indexed universal life. A particular form of universal life that lets you tie your interest gains to a market index, like the S&P 500. You’re not actually investing in that index – all of your money remains safe in your cash value account. But when the index does well, you’ll earn a higher rate of interest. When it does poorly, you’ll earn less – or possibly zero, depending on your insurer. You won’t lose any money, but you might also be able to earn more with a traditional retirement account like a 401(k) or IRA.
- Variable universal life. Another type of universal life that lets you invest your cash value in actual market securities offered through your insurer. Because you’re actually placing cash value in an investment, it has the potential to lose value. If you’re not comfortable with risk, this may not appeal to you. If you are comfortable with risk and willing to do the homework to make smart investment choices, you can grow your cash value faster than with a low fixed rate, like the kind offered with a whole life policy.
Are you looking for safe, dependable growth? Do you want some growth potential with downside protection? Or do you want the fastest possible way to grow that cash value, with the potential for losses at the same time? It’s a lot to decide – and that’s why we’re here to help.
Rather talk to a real person about life insurance? We get it – and we’re here to answer all your questions. Call us at (800) 521-7873 or click the button below to start comparison shopping with a free term life quote.
The Advantages of Cash Value
Is life insurance counted in net worth? Cash value is – and now you know why. But what can you do with it? And how do you access it?
The good news? You can do anything you want with your cash value. If you want to spend it on an investment, you can. If you want to spend it on your grandkids, you can. You’ve probably heard of the concept of “other people’s money” – as in, whenever possible, leverage your assets to secure capital from other funding sources and use that money for your investments and business ventures. Cash value is one of those assets. When you use the policy loan method described below, you can essentially use your insurer’s money while leaving your cash right where it is.
Here’s how you can access your cash value:
- Policy loan. You can borrow against your cash value with a private loan from your insurer. You can borrow up to 90% of your total cash value, in return for a small amount of interest. That amount will be offset by the interest your cash value continues to earn. Although this is structured as a loan, it’s not technically one that you must repay. If you do not, you’ll continue to accrue interest charges on it. And the total you owe will be deducted from the death benefit before it’s paid out to your loved ones. That’s a trade-off you have to keep in mind. Balance your need for cash value with the future needs of your loved ones.
- Partial withdrawal. If you don’t want to pay interest on a loan, you can simply make a withdrawal. There will be a fee, but it’s going to be less than ongoing interest payments. Keep in mind that the more you pull out, the less cash there will be to earn interest, so your overall account balance will replenish more slowly than it grew. Again, it’s a trade-off you have to consider.
- Automated premium payments. Many insurers will let you use your cash value to make your premium payments. If you anticipate having less income in the future (during retirement, on a fixed income), you may want to turn on this feature and take a break from those premium payments.
- Surrender value. If you no longer need your policy and want to cancel it, you are entitled to the policy’s cash value, minus any surrender fees. The catch? You have to cancel the policy through your insurer. You can’t simply stop making payments, or the policy will be considered lapsed (rather than surrendered). We don’t recommend canceling your policy unless your loved ones no longer need the death benefit.
Is life insurance counted in net worth? Cash value is, yes! To learn more, call us at (800) 521-7873 or click the button below to start comparison shopping with a free term life quote.
