Life Insurance: Adding Or Draining Your Net Worth?

When it comes to financial planning, understanding your net worth is crucial. Net worth is a snapshot of your current financial position, calculated by subtracting your liabilities (what you owe) from your assets (what you own). Life insurance, a financial safety net for your loved ones, can be a part of this equation, but it depends on the type of coverage. Term life insurance, the most popular and affordable option, does not contribute to net worth as it does not accumulate cash value. On the other hand, permanent life insurance, which lasts your entire life, includes a cash value component that grows over time and is accessible before death. This cash value is considered an asset and, therefore, is included in the calculation of your net worth.

The face amount of a life insurance policy

The face amount is an important component of a life insurance policy as it provides financial protection for loved ones after the insured person's death. It is also a primary factor in determining the monthly premiums to be paid. The face amount of a life insurance policy is usually stated on the policy itself and can be found in the policy's statement of benefits.

While the face amount of a current life insurance policy does not count towards your net worth, the cash value of policies and all inherited death benefits do. Net worth is calculated by subtracting your total liabilities (everything you owe) from your total assets (everything you own). Common liabilities include mortgages, credit card debt, and outstanding loans, while typical assets are bank accounts, properties, and investment accounts.

It is important to note that the face amount of a life insurance policy can change over time. For example, the face amount can increase if the insured person buys additional insurance or allows dividends to accumulate within the policy. On the other hand, withdrawals from the policy's cash value or unpaid policy loans will reduce the face amount.

In summary, the face amount of a life insurance policy is a crucial aspect of financial planning, providing support for family members and loved ones. It is influenced by various factors and can be calculated using tools or with the help of an insurance professional. While it does not directly impact net worth, the cash value and death benefits associated with a life insurance policy are considered assets that contribute to an individual's overall net worth.

Cash value of a life insurance policy

When calculating your net worth, you need to account for the value of your life insurance. While the face amount of a current life insurance policy does not count towards your net worth, the cash value of policies and all inherited death benefits do.

Cash value life insurance is a form of permanent life insurance that lasts for the lifetime of the holder and features a cash value savings component. The policyholder can use the cash value for several purposes, including borrowing or withdrawing cash from it, or using it to pay policy premiums. The cash value of life insurance can be particularly appealing because you may be able to access the money early.

The cash value of life insurance earns interest, and taxes are deferred on the accumulated earnings. While premiums are paid and interest accrues, the cash value builds over time. As the life insurance cash value increases, the insurance company's risk decreases, because the accumulated cash value offsets part of the insurer's liability.

Permanent life insurance policies such as whole life, variable life, and universal life can accumulate cash value over time. Cash value life insurance is more expensive than term life insurance because a portion of each premium payment is allocated to the cost of insurance and the remainder is deposited into a cash value account.

The two main components that make up a life insurance policy are the death benefit and the cash value. The death benefit is the part of the plan that the beneficiaries receive. At some companies, the cash value of the life insurance policy grows separately in a tax-deferred account.

Death benefits

When calculating your net worth, it is important to account for the value of your life insurance. While the face amount of current life insurance policies does not count toward your net worth, the cash value of policies and all inherited death benefits does. Death benefits are a payout to the beneficiary of a life insurance policy, annuity, or pension when the insured person or annuitant dies. They are typically paid in a lump sum, but can also be paid in installments. The death benefit amount is based on the face value of the life insurance policy, with subtractions for any withdrawals made from cash value accounts or policy loans that were not paid back.

There are several types of death benefits, including all-cause death benefits, accidental death benefits, and accidental death and dismemberment benefits. All-cause death benefits are paid for all causes of death except for those specifically excluded in the policy. Accidental death benefits are typically paid as a result of a death included in a rider added to an insurance policy. Accidental death and dismemberment benefits cover deaths from covered accidents and also include benefits for accidental dismemberment, or the loss of body parts or functions.

To receive a death benefit, beneficiaries must submit a claim form, proof of death, and proof of the deceased's coverage to the insurer. The process of receiving a death benefit from a life insurance policy is generally straightforward. Beneficiaries need to know which life insurance company holds the policy and then complete a death claim form, providing the insured's policy number, name, Social Security number, date of death, and payment preferences for the death benefit proceeds. Once the claim is approved, the beneficiary may have a choice of how to receive the benefits, including a lump-sum payout, a retained asset account, or a life income payout.

Permanent life insurance

There are a few different types of permanent life insurance policies:

Whole Life Insurance

Whole life insurance is one of the most common types of permanent life insurance. It covers the policyholder for their whole life and has regularly scheduled premiums to keep the policy active. Whole life insurance policies have fixed premiums that don't change with age or health, and the policy accumulates cash value in a secure account. The cash value can be accessed for any reason, but doing so will reduce the death benefit.

Universal Life Insurance

Universal life insurance also offers a death benefit and allows the policyholder to accumulate cash value. The main difference is that premium payments can be adjusted over time. This benefit can give the policyholder greater flexibility, but it may negatively impact the cash value of the plan and cause premiums to increase over time. Universal life insurance may be particularly useful if the policyholder works with a financial professional who can help them determine how to best invest their cash value.

Variable Universal Life Insurance

Variable universal life insurance has flexible premiums and a savings component, but more factors influence how the savings can grow. The savings portion, or cash value, grows based on the investment methods chosen by the policyholder. There is usually a minimum and maximum growth rate allowed in this type of policy. More variables lead to more risk but can also lead to more reward.

Indexed Universal Life Insurance

Indexed universal life insurance has the same basic parts as a permanent life insurance policy, but the cash value grows based on a chosen stock market index. If the chosen index is performing well, the account will grow. Some companies allow the account to grow at a minimum rate even if the index is not performing well.

The cost of permanent life insurance varies depending on factors such as age, medical history, family size, and location. It is generally more expensive than term life insurance due to the lifelong coverage and investment opportunities it offers.

Term life insurance

When calculating your net worth, it is important to account for the value of your life insurance. While the face amount of current life insurance policies does not count toward your net worth, the cash value of policies and all inherited death benefits do. This is because the face amount of a life insurance policy has no impact on the insured's net worth until they pass away, at which point the death benefit serves to increase the net worth of the beneficiary.

• Have substantial debts that their dependents would struggle to repay without their income, such as a large mortgage, jointly-owned properties with outstanding loans, or a business with debts.
• Have children who may need financial assistance until they reach adulthood, including college tuition.
• Require financial protection for a specific period, such as until retirement or until their business stabilises.
• Want to protect against income loss due to the premature death of a key employee in their business.
• Have a significant investment in a business partnership and need coverage to facilitate a smooth transition of ownership in the event of their death.

Frequently asked questions