When you plan for your finances, one of the most popular things to consider is to get a life insurance policy. Not only does it protect you and your loved ones in dire times, but it also allows you to leave behind a significant value when you can no longer protect your family.
But can you consider life insurance to be an asset?
The answer actually depends on the type of policy you have.
Before you get a policy for yourself or a family member, learn more about what makes life insurance an asset and which type of policy would work best for your needs.
If you need help figuring out where to start, explore your insurance options with a financial advisor.
What counts as an asset?
An asset refers to an item or resource that has financial value — more importantly, it is something that will generate greater returns in the future.
Assets are most commonly divided into two categories: tangible and intangible or liquid assets. Tangible assets are physical assets such as house and lot, while intangible assets are resources you cannot touch but also gain value over time.
Although life insurance policies are intangible, they are only usually considered assets when their benefits can be enjoyed while the insurance policy holder is living.
Different Types of Life Insurance
Life Insurance can be categorized into two types: term life insurance and permanent life insurance.
Term Life Insurance
A term life insurance is a type of life insurance that guarantees a death benefit to a policy holder’s beneficiaries should they pass away, as soon as the policy is still valid.
Permanent Life Insurance
Just like term life insurance, permanent life insurance guarantees a death benefit to a policy holder’s beneficiaries should they pass away. However, permanent life insurance provides life-long coverage and often promises an increase in cash value. They may also tap into the cash value even while still alive, as long as the policy reaches its maturity period.
Because of the coverage, cash value, and other charges, permanent life insurance is more expensive than term life insurance.
Considerations for using life insurance as part of a strategic wealth management plan
Before buying a life insurance policy, go through how the policy can benefit you in different aspects.
In retirement
Retirement can often be a point where most financial help is needed. Without a stable source of income to rely on, a trusted insurance policy can help provide an additional source of income when needed.
For estate planning
Life insurance can also be beneficial for real estate investment and planning. Upon the death of a person, the U.S. government typically imposes an estate tax when a piece of property is transferred to a beneficiary or a family member. A life insurance policy can come in handy in times like this by covering these estate taxes.
Maximizing wealth transfer
When a person passes on their wealth to a beneficiary such as a spouse or a child, much can be lost to taxes and other costs following a person’s death. This includes funeral costs, debt, estate, etc.
Life insurance is an ideal protection to avoid loss and keep the value of wealth intact. Furthermore, the tax-free benefits the policy holder's family will be receiving can alleviate and even cover these huge expenses, increasing the wealth passed on to the beneficiaries.
Improved asset stabilization
Protect yourself and your family from an underperforming market when you invest in life insurance. By directing a portion of your wealth into a life insurance policy, a policy holder improves the stabilization of their assets while increasing the value that they leave behind to their family when they pass away.
Funding long-term care needs
Depending on your life insurance policy, you can also enjoy your policy benefits even while you are still alive. This can be redeemed or claimed when you are terminally ill or no longer capable of earning for yourself, needing long-term care.
Advantages and disadvantages of life insurance as an asset
Before buying a life insurance policy for yourself or a loved one, think about the advantages and disadvantages of life insurance as an asset.
Advantages
Tax perks
Unlike saving in banks or investing in other markets, your cash value in your policy does not reduce due to annual taxes. As your life insurance policy grows, your cash value is not affected by the estate or income tax. This makes it a reliable resource for both the insured and the beneficiaries.
Diversification outside the financial markets
One of the most common things people go for is to store their money in stocks. However, diversification can help maximize the growth and purpose of your finances. When planning out where your money goes, it’s wise to put your eggs in different baskets. Since life insurance works a little differently than stocks and other securities, they can all work together in the future to put you and your family in a safe and better financial position.
Customizable payouts
There are different ways a beneficiary can claim life insurance payouts. Depending on your life insurance policy, they can claim these payments in lump-sum, installments, annuities, and even retained asset accounts.
Dividend earnings
Some life insurance policies offer dividends to their policy holders each year. This refers to the portion of the premiums you pay and are typically affected by the performance of the company's profits and how much the policyholder pays into the policy. Like other life insurance payouts, these earnings are non-taxable.
Disadvantages
Time it takes to build cash value
Life insurance is for those who are willing to wait to see results. Despite the returns and the promised advantages of life insurance, it can take time to build cash value. The rate at which your cash value builds depends on your policy, but in most cases, the cash value does not begin to accrue until after 2 to 5 years.
Why It Matters Whether Your Life Insurance Is an Asset
Life insurance is often taken to preserve and protect your finances even after you're gone. This is why it is important to know whether your life insurance is an asset or not.
Divorce or Bankruptcy
Divorce is expensive and can be detrimental to your finances. Fortunately, an insurance policy can help protect you and your family financially, no matter what happens. The cash value can be used to support costs incurred or continue to protect your children despite the split.
Similarly, life insurance can help put food on your table and get bills paid in the unfortunate event when you file for bankruptcy.
Collateral for a Loan
Life insurance can also be used as collateral for a loan. Since an insurance policy’s cash value guarantees payment even when the policyholder dies or defaults, most businesses accept it as collateral.
You May Be Able To Sell Your Policy
Life insurance policies can also be sold when you no longer need it. Most of the time, you can sell it at a price a little lower than the policy’s face value, so be cautious about selling your policy. Keeping your policy is often a wiser choice, especially if other options exist, such as getting early access to the death benefit.
Early Access to the Death Benefit
Many life insurance policies offer early death benefit payouts. This means accessing funds from your policy even before you die. This is especially applicable to cases when policyholders or insured individuals are terminally ill and need money to pay for their health care.
When is life insurance considered an asset?
Life insurance is considered an asset when its cash value increases over time and when it adds value to the policyholder or insured. In other words, term insurance, which is only accessible after the insured person dies, is not considered an asset.
What type of asset is cash value life insurance?
Life insurance or any form of cash value life insurance is considered a liquid asset. This means it can be converted to cash like stocks or money from a bank.
Does Whole Life Insurance Count as an Asset?
Whole life insurance counts as an asset because not only does its cash value accrue over time, it is also accessible even before the policyholder passes away.
Does Term Life Insurance Count as an Asset?
Since term life insurance is only accessible to the policyholder’s beneficiaries after they die, term life insurance cannot be considered an asset.
What kind of policy should I get?
The type of policy you should buy should be based on what you need and what you can afford. Fortunately, there are many options available for your specific needs.
Talk to a licensed financial advisor here at TexPro Insurance, the number 1 insurance broker in Houston, Texas, to explore your best life insurance choices. Seeking help from an insurance expert can help you explore options custom to your specific needs