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Is Permanent Life Insurance an Asset?
Is permanent life insurance an asset? The answer is yes – it's a smart move to include a permanent policy as part of your financial portfolio. We’ll explain why and which portion of the policy this applies to.
What Is an Asset?
To get started, let's define what an "asset" is. An asset is something that has value that is either tangible, intangible, or financial.
- Tangible assets include things like cars, houses, jewelry, or artwork – there’s a physical item you possess that you can sell in exchange for money.
- Intangible assets include things you own and can sell in exchange for money, but are not physical items, such as copyright or intellectual property.
- Financial assets include cash, stocks, bonds, retirement accounts, and the cash value portion of permanent life insurance policies.
So…is permanent life insurance an asset?
Yes, but first you need to understand the difference between its two financial components: the death benefit and its cash value account.
What Is Permanent Life Insurance?
Permanent life insurance is a way to ensure you loved ones get an income-tax-free cash payout when you pass away, no matter when that happens.
Your policy is a contract between you and the insurance company. In return for your payments, the insurance company promises to pay your beneficiary(ies) a stated amount of cash when you pass away. Your policy covers you until the end of your life, so as long as you keep it in force by staying current with your payments, coverage can’t be cancelled.
You can have multiple beneficiaries, and you can also assign percentages of the death benefit to each beneficiary. You can also select an institution as a beneficiary, which is how many people leave money to their favorite charities or their alma mater.
Most of our clients buy permanent life insurance because they want a guaranteed death benefit for their loved ones. That death benefit can replace lost income, pay off the mortgage, pay a child’s tuition, or give your family a financial cushion as they grieve.
Most insurers will even let you access a portion of the death benefit if you’re diagnosed with a terminal illness. Policy add-ons called “riders” let you purchase other ways to access the death benefit to pay for long-term care, or treatment for critical or chronic illnesses.
The next step in answering the question “is permanent life insurance an asset,” we need to look at its two components: the death benefit and the cash value.
Is the Life Insurance Death Benefit an Asset?
In most cases, when we’re talking about assets, we’re talking about your estate.
In legal terms, an estate is everything you own. This includes your home, your car(s), the cash in your bank account, the possessions inside your home, any investments you have, any portion of a business you own, etc. If you can sell it, it’s an asset that’s part of your estate.
But you can’t sell your life insurance policy’s death benefit…so is permanent life insurance an asset? The death benefit portion of your policy is not an asset because you have no direct access to that money.
Is the Life Insurance Death Benefit Part of Your Estate?
Yes – although it’s not an asset, the life insurance death benefit is a part of your estate.
As soon as you pass away, the life insurance contract stipulates that the insurer pay the policy’s face value to your beneficiaries (once they make the claim). Even if you don’t have anything else to leave behind, your death triggers the ability for your beneficiaries to make a claim – and the requirement of the insurance company to pay that death benefit.
While the rest of your estate will be subject to probate (if you left a will) or state review (if you didn’t leave a will), there’s no question about what happens to that death benefit. It’s not subject to probate and cannot be contested. It can only be paid out the people or institutions that you specified and no creditors, relatives, or exes can change that.
If, however, none of your beneficiaries are alive when you pass away, the death benefit will be subject to probate or state review. That’s why it’s crucial to keep your beneficiary list updated!
What Is Cash Value?
One unique feature of permanent life insurance is cash value. This feature is not available with term life insurance. For more on the difference between term and permanent policies, check out this article.
Every time you make a payment, your insurer deposits a small portion of that payment into your policy’s cash value account. They periodically credit that account with a stated rate of interest, specified in your policy documents. That cash grows tax-deferred. The longer you let it grow, the more cash you’ll have access to later.
Different policy types have different interest crediting strategies.
- Least cash value: Whole life insurance. The interest rate is set when you buy the policy and does not change.
- Cash value tied to the performance of a financial index: Indexed universal life insurance. Choose an index (such as the S&P 500) and if it performs well, the insurer credits you according to the percentage of the index’s gains. If it performs poorly (or loses value), you won’t lose any cash value – but you may not earn any interest, either. Some insurers will give you a very small guaranteed rate.
- The chance to invest your cash value, risking loss for the opportunity to gain: Variable universal life insurance. Here, you can actually invest some or all of your cash value using subaccounts. Because this is an actual investment, there’s the possibility that you could lose money. But you also have the chance to accrue cash value faster with smart investing decisions.
Is the Life Insurance Cash Value an Asset?
Yes, cash value is an asset that counts as part of your net worth. That’s because you can access and use that cash during your lifetime.
- Withdraw a portion. You can withdraw some or all of your cash value according to your insurer’s policies. You will probably have the option of withdrawing as a lump sum or in a series of payouts. The amount you withdraw will be deducted from the death benefit paid out to your beneficiaries when you pass away.
- Take out a loan. Although these are called “policy loans,” you don’t technically have to pay them back. Most insurers charge a small amount of interest, but they won’t check your credit and the loan itself won’t alter your current credit rating. If you pay the loan back, great. If you don’t, the insurer will deduct that amount from the death benefit before they pay it out to your beneficiaries.
- Surrender the policy. If you cancel or surrender the policy, you are entitled to the accumulated cash value (minus any surrender fees and applicable income taxes). The problem here? You’ll no longer have an active policy, which means your loved ones will get nothing from the insurer when you pass away. Think of this option as a last resort.
You can also use your cash value to make your policy’s payments. So while this doesn’t put the actual cash value in your pocket, it frees up other funds you wouldn’t have otherwise had.
Summary: Is Permanent Life Insurance an Asset?
Yes.
Your policy’s cash value is an asset because that’s cash you can access – it counts toward your net worth. The death benefit does not count towards your net worth because you cannot access it directly.
Want to talk to a real person about all this?
We’re happy to help! Give us a call at (800) 521-7873 and let’s go over your options!
