Insurance: Asset Or Expense?

Whether or not insurance is considered an asset depends on the type of insurance and the nature of the policy. Life insurance, for example, is considered a necessity for most people, but only some types are classified as assets. Term life insurance, which covers the insured for a set period, is not considered an asset as it does not have an accessible cash value during the lifetime of the insured and does not pay out if the insured outlives the policy. On the other hand, permanent life insurance policies, such as whole life, universal life, and variable life, are considered assets because they accumulate cash value that can be accessed by the policyholder during their lifetime.

Term life insurance is not an asset

Term life insurance is not considered an asset because it doesn't have any cash value. In other words, it has no underlying value that you can draw on while you're alive. It is designed to provide temporary coverage for a set period, usually 10 to 30 years, and if the insured person outlives the policy, they receive nothing.

Term life insurance is distinct from permanent life insurance, which accumulates cash value over time. With permanent life insurance, the policyholder pays into the policy at a rate that exceeds the actual premium cost, and this excess contributes to a cash value that can be withdrawn or borrowed against later in life. This cash value component is what makes permanent life insurance an asset.

Term life insurance does have value in that it provides essential life insurance protection, and it can be extremely valuable to your family and your peace of mind. However, because it doesn't build cash value, it is not technically considered an asset.

Whole life insurance is an asset

Whole life insurance is also considered an asset during divorce proceedings or mortgage underwriting. The cash value of a whole life insurance policy is included in the value of your estate, and it can be used to provide financial stability for your family or beneficiaries after your death.

However, it is important to note that the death benefit of a life insurance policy is not considered an asset. Additionally, whole life insurance policies often come with higher premium payments compared to term life insurance.

Universal life insurance is an asset

Universal life insurance is a type of permanent life insurance that offers flexible premium payments and lifelong coverage. It is considered an asset because it accumulates cash value over time, which can be accessed by the policyholder in several ways.

Universal life insurance policies have a cash value component that grows based on interest rates set by the insurer. This cash value can be used in several ways:

• Surrender value: The policyholder can surrender the policy and receive the cash value.
• Loan collateral: The cash value can be used as collateral for a loan from the insurance company.
• Premium payments: The cash value can be used to pay premiums, helping to maintain coverage during retirement or other periods of lower income.

Advantages of Universal Life Insurance as an Asset

Universal life insurance offers several benefits that make it a valuable asset:

• Flexible premiums: Policyholders can adjust their premium payments within certain limits, which is helpful for those with variable cash flow or fluctuating incomes.
• Potential cash value growth: The cash value component of universal life insurance earns interest, providing the opportunity for growth over time.
• Lifetime coverage: Universal life insurance offers coverage for the entirety of the policyholder's life, as long as premiums are paid.
• Tax advantages: Withdrawals from the cash value of a universal life insurance policy typically have no tax implications, providing a tax-efficient way to access funds.

Considerations and Disadvantages

While universal life insurance can be a valuable asset, there are some considerations and potential disadvantages to keep in mind:

• Monitoring required: Policyholders need to carefully monitor the cash value to ensure it remains sufficient to cover the cost of insurance and other expenses. If the cash value drops too low, the policy may lapse.
• Risk of large payments: If the cash value is insufficient to cover costs, policyholders may be required to make large payments to maintain their coverage.
• Variable interest rates: The interest rates on the cash value component can vary, and if interest rates drop, the cash value may not grow as expected.
• Potential for high fees: Universal life insurance policies may have higher fees compared to other types of insurance, especially if the cash value is invested in sub-accounts or mutual funds.

In conclusion, universal life insurance is considered an asset due to its ability to accumulate cash value, which can be accessed by the policyholder through withdrawals, loans, or surrender of the policy. However, it is important to carefully manage the policy to avoid potential pitfalls such as insufficient cash value and unexpected fees.

Variable life insurance is an asset

Variable life insurance is a type of permanent life insurance policy that covers you for your entire life as long as you pay the premiums. It is considered an asset because it has a cash value component.

Variable life insurance policies have a death benefit and a cash value. The death benefit is what is left to your beneficiaries when you die. A portion of the premium goes towards the cost of insurance and the fees of the insurer who is keeping the death benefit in place. The remainder of the premium goes towards the policy's cash value.

The cash value can be invested in certain securities (often called subaccounts) which resemble mutual funds. If the cash value performs well, it can be used to increase the death benefit, withdrawn as cash, or used as collateral for a loan. The cash value is also the amount of money you would receive if you decided to give up (or surrender) your coverage to the insurer.

Variable life insurance is considered an asset because of this cash value component. The cash value of a variable life insurance policy is similar to a brokerage account. It can be invested in securities such as stocks, bonds, equity funds, money market funds, and bond funds. The cash value can grow over time and be utilised in various ways, such as paying premiums, increasing the death benefit, or being withdrawn as cash.

However, it is important to note that variable life insurance policies do not guarantee a rate of return. The investment options chosen for the policy may perform poorly, resulting in a loss of money, including the initial investment. Additionally, variable life insurance policies tend to have higher fees and premiums compared to other types of life insurance.

Insurance as an asset in divorce

Insurance can be considered an asset in certain situations. This is true in the case of divorce as well. Here's what you need to know about insurance as an asset during divorce proceedings:

Types of Insurance as an Asset

Not all insurance policies are considered assets. It depends on whether the policy has a cash value component that can be accessed by the policyholder. Term life insurance policies, for example, do not have a cash value and are not considered assets. On the other hand, permanent life insurance policies, such as whole life, universal life, and variable life insurance, accumulate cash value and are often treated as assets. This cash value can be a significant factor in divorce settlements.

Impact on Divorce Proceedings

During a divorce, it is essential to determine if any insurance policies are considered marital assets. If you have a permanent life insurance policy with a cash value, this value is typically considered a joint asset and must be listed among the assets to be divided. The cash value represents part of the couple's net worth, and it is common to divide it evenly between the spouses. This may involve cashing out the policy and splitting the proceeds, or one spouse may retain the policy but be required to keep the other spouse as a beneficiary.

Beneficiary Changes

Divorce often necessitates changes to the beneficiaries of life insurance policies. Most married couples list their spouse as the primary beneficiary. After a divorce, individuals usually want to remove their ex-spouse as the beneficiary and designate someone else, such as a parent, sibling, or a trust. However, if there are children involved and one spouse relies on the other for alimony or child support, a judge may order the policyholder to keep the ex-spouse as a beneficiary to ensure continued financial support in the event of their death.

Court-Ordered Life Insurance

In some cases, a judge may include life insurance as part of the spousal support in the divorce settlement, especially if there are children or financial support involved. This is known as court-ordered life insurance, and it typically requires one spouse to purchase a life insurance policy with the other spouse as the beneficiary. The deadline for obtaining this policy is usually set by the court, and proof of obtaining the policy must be provided.

Seeking Professional Guidance

Divorce can be a complex and emotionally charged process, and it is beneficial to seek guidance from professionals. A divorce attorney can help navigate the legal aspects, while a financial advisor or accountant can assist in valuing and dividing assets, including insurance policies with cash value. It is essential to understand your rights and make informed decisions about your financial future during this challenging time.

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