Life Insurance: An Asset Or A Liability?

Life insurance is a necessity for most people, but whether it counts as an asset depends on the type of policy and the reason for the classification. Term life insurance, which only pays out to dependents in the event of the policyholder's death, is not considered an asset. In contrast, whole life insurance and other types of permanent life insurance with a cash value component are considered assets because the policyholder can withdraw funds while they are alive.

Term life insurance is not an asset

Term life insurance is not considered an asset because it doesn't have any cash value. It is a form of protection that lasts for a set period, usually 10 to 30 years, and pays out a death benefit to your beneficiary only if you die while the policy is active. If you outlive the policy, it expires, and you get nothing in return.

Term life insurance is different from whole life insurance, which accumulates a cash value that the owner can access during their lifetime. This cash value component makes whole life insurance an asset. The cash value of whole life insurance policies grows over time and can be borrowed against or withdrawn by the owner.

The main distinction between term and whole life insurance is that term life insurance lacks cash value and only lasts for a specified term. In contrast, whole life insurance policies are permanent and offer both a death benefit and a cash value component.

While term life insurance is not considered an asset in the traditional sense, it still provides significant value by offering peace of mind and financial protection for your loved ones in the event of your death.

Whole life insurance is an asset

Whether or not life insurance counts as an asset depends on the type of policy. Whole life insurance is considered an asset because it builds cash value over time. This cash value can be accessed by the policyholder via loans or withdrawals while they are still alive. This is in contrast to term life insurance, which does not have a cash value component and is therefore not considered an asset.

The classification of whole life insurance as an asset can have various implications. For example, it can be considered an asset during divorce proceedings or when applying for Medicaid, potentially affecting eligibility. On the other hand, having whole life insurance as an asset can be beneficial when applying for a mortgage, as it demonstrates financial stability and the ability to pay bills.

It is important to note that the rules and regulations regarding life insurance as an asset can vary depending on the specific situation and jurisdiction. For example, in the context of Medicaid, small whole life insurance policies with a face value of less than $1,500 are typically exempt and not counted as assets. Additionally, the tax implications of whole life insurance policies may differ based on the specific circumstances and location.

Life insurance as an asset in divorce proceedings

Life insurance is often overlooked during divorce proceedings, but it is an important part of the process, especially for couples with children. It is a complex issue that varies depending on the type of policy and the state of residence. Here is a detailed overview of life insurance as an asset in divorce proceedings:

Term Life Insurance vs Permanent Life Insurance

The treatment of life insurance in divorce proceedings depends on the type of policy. Term life insurance policies are typically considered separate assets and are not divided during the divorce. On the other hand, permanent life insurance policies, such as whole life or universal life insurance, may be treated differently. These policies often have a cash value component that is considered a financial asset and may be subject to division. The cash value of these policies represents the couple's net worth, and it is equitable to list it among the marital assets to be divided.

Beneficiary Changes

One of the crucial steps in dealing with life insurance during a divorce is updating the beneficiaries. Most married individuals list their spouse as the primary beneficiary. However, after a divorce, especially an acrimonious one, individuals may want to remove their ex-spouse as the beneficiary. In some cases, a judge may require the policyowner to keep the ex-spouse as the beneficiary if there are alimony or child support payments involved. It is important to consult a lawyer to understand the specific implications and rules regarding beneficiary changes.

Protecting Alimony and Child Support

Life insurance can play a vital role in protecting alimony and child support payments. If the spouse providing these payments has a life insurance policy, the recipient can ensure continued financial support by maintaining the policy and keeping themselves as the beneficiary. This is especially important for the spouse with primary custody of the children, as it ensures financial protection for the children's upbringing.

Court-Ordered Life Insurance

In some cases, a judge may include life insurance as part of the divorce settlement. This is known as court-ordered life insurance. If one spouse is required to pay alimony or child support, the judge may order them to purchase a life insurance policy with their ex-spouse as the beneficiary. The specifics of such policies, including the term, coverage amount, ownership, and premium payments, are typically coordinated between both parties and their respective lawyers.

Impact on Financial Planning

Divorce can significantly impact an individual's financial situation, and life insurance needs may change. It is recommended to review and adjust life insurance coverage to align with new financial circumstances. This could include purchasing additional coverage or adjusting the beneficiary to ensure loved ones are adequately protected.

In summary, life insurance is an important consideration in divorce proceedings, and it can help protect the financial interests of both parties and their dependent children. The treatment of life insurance as an asset varies depending on the type of policy and state laws, so it is essential to consult with a lawyer and financial advisor to navigate this complex issue effectively.

Life insurance as an asset when applying for Medicaid

Life insurance can be counted as an asset when applying for Medicaid, depending on the type of policy and its value. Medicaid is a public assistance program that provides health insurance to low-income families, seniors, and people with disabilities. To qualify for Medicaid, applicants must meet strict income limits and can usually not have more than $2,000 in assets.

There are two main types of life insurance: term life insurance and whole life insurance. Term life insurance provides coverage for a limited amount of time, and if the policyholder dies within this period, the beneficiaries will receive a payout. However, if the policyholder outlives the policy, it expires, and no benefits are paid out. Term life insurance does not accumulate cash value and therefore does not count as an asset when applying for Medicaid.

On the other hand, whole life insurance covers the policyholder for their entire life and pays out a death benefit to beneficiaries when the policyholder dies. Whole life insurance policies accumulate a cash value that the policyholder can access, which is why they can be counted as an asset for Medicaid eligibility purposes. However, small whole life insurance policies with a face value of less than $1,500 are exempt from the calculation of assets. If the policy's face value exceeds $1,500, the cash surrender value becomes an available asset and may affect Medicaid eligibility.

It is important to note that the treatment of life insurance policies and exemption limits can vary by state. Some states, like Florida, Alabama, and North Carolina, have higher face value exemption amounts. Additionally, some states have different rules regarding burial policies and other variables that can impact Medicaid eligibility. Therefore, it is recommended to consult with a professional Medicaid planner or an elder law attorney to navigate the complexities of Medicaid eligibility and life insurance policies.

Life insurance as collateral for a loan

Whether or not life insurance is considered an asset depends on the type of policy and the reason for the classification. Term life insurance, which only pays out to your dependents in the event of your death, is not considered an asset. However, 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're alive.

Life insurance can be used as collateral when applying for a loan through a process called collateral assignment. This allows you to use your life insurance policy's death benefit as loan collateral. If you pass away before fully repaying your loan, the lender or "assignee" can be repaid for the outstanding loan amount using your death benefit. The rest of the death benefit would then be given to your beneficiaries.

Collateral assignment of life insurance can be a good option if you want to access funds without putting your assets, such as your car or house, at risk. It may also be a good choice if you have a low credit score, as lenders are more likely to offer favourable terms since they can rely on the policy's death benefit to pay off the loan if necessary. Additionally, some lenders may require collateral assignment of life insurance for business loans.

To take out a loan using a collateral assignment of life insurance, you will need to find a lender who accepts this form of collateral. You will then need to apply for a life insurance policy that meets the lender's requirements, fill out a collateral assignment form, and submit it with your loan application. It's important to note that using your life insurance policy as collateral may impact your beneficiaries if you default on the loan or pass away with an outstanding balance, as the death benefit payout will be reduced by the amount owed to the lender.

Frequently asked questions