Life Insurance: Asset Or Liability?

Life insurance is a necessity for most people, but only some types are classified as assets. An asset is something you own or control, and assets typically have some type of value you can access. Whether a life insurance policy is an asset depends on whether you can benefit financially from your policy while you're alive. Term life insurance, which only pays out to your dependents in the event of your death, is not 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.

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 designed to provide financial protection for your family or beneficiaries in the event of your death. Here are some key reasons why term life insurance is not typically classified as an asset:

No Cash Value

Term life insurance policies do not accumulate cash value over time. Unlike permanent life insurance policies such as whole life or universal life insurance, which have an investment component where cash value can grow, term life insurance is purely protection-focused. It is designed to provide a death benefit to your beneficiaries if you pass away during the specified term of the policy.

Temporary Coverage

Term life insurance is meant to provide coverage for a set period, typically 10 to 30 years. If you outlive the policy term, it expires, and you don't receive any payout. This temporary nature of term life insurance means it doesn't meet the definition of an asset, which is something expected to have value in the future.

No Value During the Policyholder's Lifetime

With term life insurance, you cannot access any cash value or benefit from the policy while you are alive. It is solely intended to provide financial security for your loved ones after your death. This lack of accessibility during the policyholder's lifetime is another reason why term life insurance is not generally viewed as an asset.

Not Considered in Financial Forms

When filling out financial forms, such as mortgage applications, term life insurance is typically not listed as an asset. Financial institutions rarely consider term life insurance as an asset because it does not have an inherent cash value.

Peace of Mind, Not an Asset

While term life insurance has immense intangible value in the form of peace of mind, knowing that your family will be financially protected in the event of your death, this does not translate into tangible financial value.

In summary, term life insurance is not generally considered an asset because it lacks cash value, is temporary in nature, and does not provide any financial benefit to the policyholder during their lifetime. Its primary purpose is to safeguard your loved ones financially, which, while incredibly valuable, does not fit the definition of an asset in the traditional financial sense.

Whole life insurance is an asset

Life insurance is a necessity for most people, but only some types are classified as assets. An asset is something you own that has economic value and is expected to provide a future financial benefit.

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. With whole life insurance, a portion of your premiums goes into a tax-deferred savings account, called the cash value of the policy. The exact amount depends on the terms of your individual policy. Because the policy's cash value earns interest over time and you can withdraw from those funds, the amount is included in the value of your estate.

The death benefit of a life insurance policy is not considered an asset. However, some policies have a cash value, which is considered an asset. Only permanent life insurance policies, like whole life, can grow cash value. The cash value of a life insurance policy is a secondary benefit that can be used to help with liquidity and estate planning. While the death benefit of a life insurance policy is not an asset, the cash value is because you can access it.

When you have the correct type of permanent life insurance, you can use the cash value it accrues in a variety of ways. It can be useful if you need emergency funds or help with estate planning. The cash value of life insurance can also be used to help protect wealth and transfer it to heirs. That's in addition to the death benefit. The right strategy can make it easier to split assets evenly among heirs or to pay off debts, so tangible assets (like a beloved home) don't need to be sold.

Universal life insurance is an asset

Universal life insurance is a form of permanent life insurance that offers lifelong coverage and provides flexibility in paying premiums. It is considered an asset because it has a cash value component that can be accessed and utilised while the policyholder is still alive. This cash value accumulates over time, allowing policyholders to withdraw funds, borrow against the cash value, or use it to pay premiums.

The cash value of universal life insurance grows according to the performance of the insurer's portfolio and is guaranteed to increase at a minimum annual interest rate. This interest rate is set by the insurer and can change frequently, although there is usually a minimum rate to protect the policyholder. The cash value can be used as surrender value, loan collateral, or to pay premiums, providing financial benefits to the policyholder during their lifetime.

Unlike term life insurance, which only covers a set period and does not have a cash value component, universal life insurance offers more flexibility. Policyholders can adjust their premiums and death benefits within certain limits. This flexibility allows individuals to increase or decrease their premium payments, making it a valuable asset for those seeking lifelong coverage with varying payment options.

Additionally, universal life insurance is often compared to whole life insurance, another form of permanent life insurance. While whole life insurance offers fixed premiums and guaranteed cash value growth, universal life insurance provides the advantage of potential upside when the insurer's portfolio performs well. This makes universal life insurance a desirable asset for those seeking the stability of lifelong coverage with the added benefit of potential cash value growth.

In summary, universal life insurance is an asset because it provides policyholders with financial benefits during their lifetime. The ability to accumulate and access cash value, coupled with the flexibility in premium payments, makes universal life insurance a valuable tool for individuals seeking lifelong coverage and financial flexibility.

Indexed universal life insurance is an asset

Whether a life insurance policy is considered an asset depends on whether the policyholder can benefit financially from the policy while they are alive. Term life insurance, which only pays out to dependents in the event of the policyholder's death, is not considered an asset. Whole life insurance and other types of permanent life insurance with a cash value component are considered assets because the policyholder can withdraw funds from the policy while they are alive.

Indexed universal life insurance (IUL) is a type of permanent life insurance that provides a cash value component along with a death benefit. The cash value in an IUL policy can earn interest by tracking a stock market index selected by the insurer, such as the Nasdaq-100 or the Standard & Poor's 500. The interest rate derived from the equity index account can fluctuate, but the policy offers an interest rate guarantee, which limits potential losses. IUL policies also typically cap returns but guarantee a minimum interest rate.

The cash value in an IUL policy can be used to lower or potentially cover premiums without reducing the death benefit. Policyholders can decide how much cash value to assign to an equity-indexed account and to a fixed-rate account, if available. The value of the selected index is recorded at the beginning of the month and compared with the value at the end of the month. If the index increases during the month, interest is added to the cash value. If the index decreases, no interest is credited to the cash account.

IUL policies offer permanent, lifelong coverage when premiums are kept up to date, as well as flexible premiums and death benefits. The accumulated cash value can be accessed at any time without penalty, and there are no limitations on annual contributions. However, IUL policies are more expensive than term life insurance and may include management fees, premium calls, and tax consequences for loans and withdrawals.

In summary, indexed universal life insurance is considered an asset because it provides a cash value component that can be accessed by the policyholder during their lifetime. The cash value can earn interest based on the performance of a stock or bond index, and it can be used to pay premiums or withdrawn as needed. While IUL policies offer flexibility and permanent coverage, they also come with higher costs and potential fees compared to other types of life insurance.

Variable 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 your policy while you're alive. Term life insurance, for instance, is not considered an asset because it lacks cash value and only pays out to your dependents in the event of your death.

Variable life insurance, on the other hand, is considered an asset. It is a permanent life insurance product that contains separate accounts made up of various instruments and investment funds, such as stocks, bonds, equity funds, money market funds, and bond funds. The bulk of the premium is invested in one or more separate investment accounts, with the opportunity to select from a wide range of investment options.

Variable life insurance is often more expensive than other life insurance products due to administration fees and fees for managing the investments held by the fund. It is also considered a securities contract because of the investment risks involved. Sales professionals must provide a prospectus of available investment products to potential buyers as per federal regulations.

Variable life insurance has specific tax benefits, such as the tax-deferred accumulation of earnings. Policyholders may access the cash value via a tax-free loan as long as the policy remains in force. However, unpaid loans, including principal and interest, reduce the death benefit, and interest or earnings included in partial and full surrenders of the policy are taxable at the time of distribution.

The flexibility of variable life insurance is an attractive feature, as it allows policyholders to adjust their premium payments within limits based on their needs and investment goals. It also offers the potential for significant investment earnings, with many policies providing a wide array of investment options to suit most investors.

Frequently asked questions