Life Insurance Payouts: Are They Counted As Assets?

Life insurance is a financial safety net for your loved ones when you pass away. But did you know that certain types of life insurance policies can also be a financial asset for you to utilise while you're alive? The answer to do life insurance payouts count as an asset depends on the type of life insurance policy in question. Term life insurance, which is valid for a set period, does not accumulate cash value and thus does not count as an asset. In contrast, permanent life insurance policies like whole life insurance and universal life insurance offer both a death benefit and the ability to build cash value over time, making them valuable assets. These policies enable you to invest in conservative options like mutual funds and offer access to cash value through loans, withdrawals, or accelerated benefits in medical emergencies. While life insurance proceeds typically go directly to named beneficiaries and bypass probate, they can become estate assets if the policy is payable to your estate or if the named beneficiary dies before you. Understanding the specifics of your policy is crucial to making the most of your life insurance as a financial asset.

Term life insurance is not an asset

Term life insurance is not considered an asset because it does not have any cash value. It is designed to provide temporary coverage for a set period, usually between 10 to 30 years, and it pays out a death benefit to beneficiaries only if the insured person dies while the policy is active. If the insured person outlives the policy, they receive no financial benefit.

Term life insurance policies are also significantly cheaper than whole life insurance policies, as they do not accumulate cash value. Once the term expires, coverage ends or the price increases. Therefore, term life insurance cannot be considered an asset because it does not enhance one's financial status or put money in one's pocket.

In contrast, whole life insurance and other types of permanent life insurance are considered assets because they have a cash value component. Policyholders can withdraw funds while they are still alive, and the cash value grows over time. This cash value can be used for emergencies or estate planning, providing financial stability.

While term life insurance is not an asset, it is still a valuable tool for protecting one's assets and ensuring financial stability for loved ones in the event of the policyholder's death. It offers peace of mind and can be extremely beneficial to one's family.

In rare cases, proceeds from a term life policy might be considered an asset if the policy is sold for a profit or if the beneficiary inherits a large enough amount that they need to pay an estate or gift tax.

Whole life insurance is an asset

Whether or not life insurance is considered an asset depends on the type of policy and whether you can benefit financially from the policy while you're alive. Whole life insurance is a form of permanent life insurance that is considered an asset because it has a cash value component that you can withdraw funds from while you're alive.

When considering whole life insurance as an asset, it's important to note that the death benefit of a life insurance policy is not considered an asset. However, the cash value, which is a secondary benefit, can be used to help with liquidity and estate planning. The cash value of whole life insurance can be accessed while the policyholder is still alive and can be used for various purposes, such as emergency funds or retirement savings.

Whole life insurance is particularly relevant during divorce proceedings or mortgage underwriting. In the context of a divorce, any cash value policies must be listed as an asset when dividing property. This includes joint or survivorship policies that cover both spouses.

Universal life insurance is an asset

Universal life insurance is a type of permanent life insurance that offers lifetime coverage as long as you pay your premiums. It is one of the two main types of permanent life insurance, the other being whole life insurance. Universal life insurance functions similarly to whole life insurance, but it offers more flexibility.

Universal life insurance policies can be used as an asset because they have a cash value component. This means that the policy accumulates cash value over time, which can be accessed by the policyholder. The cash value grows on a tax-deferred basis, and the death benefit is paid income-tax-free to beneficiaries. Policyholders can also take out policy loans against the cash value, use it to pay premiums, or even use the coverage for cash to supplement their income in retirement.

Universal life insurance offers the flexibility to raise or lower premiums within certain limits, so it can be more affordable than whole life insurance. However, it also offers fewer guarantees than whole life insurance. If you make minimal premium payments for too long, it can impact the cash value growth and the size of your death benefit. Additionally, the interest rate on the cash value is set by the insurer and can change frequently, so there is no guarantee on the rate your money will earn over time.

Overall, universal life insurance can be a valuable asset for policyholders, providing lifetime coverage, flexibility in payments, and access to cash value. However, it is important to carefully manage the policy and monitor the cash value to ensure that the policy remains active and provides the desired benefits.

Life insurance proceeds are not probate assets

The only exception is when the insurance policy is payable to "your estate" or when the only named beneficiary dies before you. Without a beneficiary who outlives you, the life insurance funds will be considered estate assets, similar to a bank account you owned.

It is important to note that term life insurance, which only pays out to your dependents in the event of your death, is not an asset. On the other hand, whole life insurance and other types of permanent life insurance with a cash value component are considered assets because you can withdraw funds from your policy while you are alive.

In summary, life insurance proceeds are generally not probate assets, but there are exceptions, and it is important to understand the terms of your policy and keep your beneficiary designations up to date to ensure your wishes are carried out.

Life insurance payouts are not taxable

The primary purpose of life insurance is to provide financial stability for your family and/or beneficiaries after you are gone. This is done through a lump-sum payment, known as a death benefit or life insurance benefit. The death benefit does not count as an asset, and so it cannot be earmarked to pay off any debts of the deceased. This means that beneficiaries will receive the full amount. Once the beneficiary has received the benefit, it is then considered a liquid asset of theirs.

However, there are some exceptions to this rule. If you sell a term life insurance policy for profit, any earnings from the sale count as an asset and are subject to income tax. Additionally, if your assets total $13.61 million or more, your beneficiary may need to pay an estate or gift tax on the total assets they inherit.

It is important to note that only permanent life insurance policies, such as whole life insurance, can grow cash value. Term life insurance does not accumulate cash value and so does not count as an asset.

Frequently asked questions