Life insurance as an asset

Definitions for the word “asset” vary. In terms of financial accounting, an asset is something you own that you can convert into cash.

Under that definition, not every life insurance policy is considered an asset. And knowing how to capitalize on the policies that are can help you determine whether to stay the course or find a better way to invest the money.

Is life insurance an asset?

A traditional term life insurance isn’t considered an asset, because its only value is the death benefit paid to your family if you die within the specified term.

However, most permanent life insurance policies have a cash component and accumulate cash value over time. While it can take years — or even decades — to build up enough cash value to start borrowing against your policy, permanent policies are considered a cash asset.

Is whole life insurance an asset?

Yes. Whole life has a savings component, where a portion of your premium is invested to earn cash value over time. Your cash value can be withdrawn for use while you’re still alive, so it’s considered an asset.

What other types of life insurance are assets?

The following life insurance policies build cash value and are therefore considered assets:

• Universal life insurance. Offers lifelong coverage as well as flexible death benefits and payment options — making it ideal for those who foresee income fluctuations in the future,
• Variable life insurance. With this policy, you can invest your cash value into a range of subaccounts, and choose riskier investments for the possibility of a greater return.
• Indexed universal life insurance. Rather than choosing a risk level or standard investment, indexed universal life insurance ties the investment of your cash value to the performance of an equity index, such as the S&P 500.

Is life insurance considered a good investment?

Life insurance is an important way to protect your loved ones after you die, and your policy can also be an investment that grows wealth while you’re still alive. Here are some positives of a life insurance investment:

• Uncorrelated asset. Some people see life insurance as a good way to diversify assets, because the cash value of your life insurance isn’t tied to the whims of the financial market. So even if your stock investments decline, your life insurance investment should remain steady.
• Tax-free loans. Once your cash value reaches a certain point, you can take out tax-free loans on the available funds. You still have to pay interest, but that interest is bound to be less than the taxes and fees you’ll pay to withdraw the money.
• Dividends. If you have insurance with a mutual insurer, you earn dividends on company profits that you can use to pay your premiums. Or, you can buy a paid-up additions rider that reinvests your dividends with your existing cash value.
• Long-term investment. Life insurance isn’t the kind of investment you make for a quick return. It can take 10 to 20 years of paying premiums before the cash value grows in any significant way.

The tax advantages of permanent life insurance

In terms of tax treatment, life insurance is treated more favorably than annuities, savings bonds, CDs and other investment products.When you die, the death benefit paid out to your beneficiaries isn’t taxed.If your estate is worth more than $11.58 million — the IRS threshold for 2020 — it may be subject to estate taxes. For this reason, many high net worth individuals take out a policy to help their heirs to cover estate taxes when they die. By doing this, they can prevent their families from having to sell off other assets — like properties — to pay the tax bill.

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When isn’t life insurance considered an asset?

The cash value of your policy can legally be considered an asset, but the law doesn’t consider your cash value an asset in these key situations.

• Applying for financial aid as a student. Your life insurance policy can’t be considered an asset when you’re applying for financial aid to go to college. Because of this, some people prefer investing money for their children in a life insurance policy instead of a 529 college savings plan, which can be considered an asset when applying for aids or student loans.
• Investment income tax. The Net Investment Income Tax applies a 3.8% tax to certain types of investment income as part of the Affordable Care Tax. But your life insurance cash value isn’t subject to the tax.
• Medicare. Your life insurance isn’t considered when your Medicare premiums are calculated.
• Social Security. The cash value of your life insurance isn’t part of the income tax charged against your Social Security benefits.

Should I work with a financial planner to get life insurance?

A financial planner takes a holistic view of your finances and tailors their advice to meet the financial goals you’ve set for your future. Not everyone has financial assets that require expert help, but if you’re considering hiring one, make sure they’re qualified.

A quality financial planner will have one of three certifications: a Certified Financial Planner, a Chartered Financial Analyst or Personal Financial Specialist certification. If you’re unsure about what kind of financial professional you need, take a little time to compare your options.

Do I have to list life insurance as an asset during a divorce?

Your life insurance policy isn’t automatically considered a marital asset. But the savings component on your permanent policy can be subject to a divorce agreement as an investment asset.

Some spouses ask for control over the life insurance policy, even if they are not the insured, as a way to protect their alimony and child support payments from lapsing. But if you retain control of your life insurance after a divorce, your ex-spouse will remain the beneficiary until you remove them.

Bottom line

While the savings component of your permanent life insurance policy won’t offer your highest investment returns, it can be an important asset to your financial portfolio. And if it’s important to you that your investment get the highest possible returns, be sure to shop around your life insurance options to find a policy that matches your expectations.

Frequently asked questions about life insurance assets

• What does it mean if a whole life policy is paid-up?

  After you’ve paid into your policy long enough to accrue significant cash value, you may decide that rather than continue to build up the savings component of your policy, you’d like to stop paying your premiums without letting the policy lapse.

  Depending on your plan, you may have the option to convert your policy to a paid-up insurance policy, which allows you to pay your premium from the cash value. However, this decreases the value of your policy, and the death benefit. And, if your insurance pays you a dividend based on its profits, you can also use that money to pay your premiums.

• What are paid-up addition riders?

  Paid-up additions are like adding paid-in-full cash-value-only life insurance to your existing policy. People often use the dividends they earn on their existing policy to buy these riders. But the paid-up additions also earn dividends as separate policies, which can be used to purchase more riders.

• Can I keep my ex-spouse as my life insurance beneficiary after a divorce?

  Yes. You can also choose to name your children as the beneficiary and have your ex-spouse listed as their guardian in charge of using the money for their care.