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An asset is an investment you hope to receive a return on
Term life insurance is not considered an asset because ideally you won’t collect on it
The cash value of whole life insurance may be considered an asset, but isn’t an efficient way to invest for most people
Is a life insurance policy an asset? It depends: term life insurance, which is meant only to protect your dependents in the event of your premature death, is not an asset. On the other hand, whole life insurance and other types of life insurance with a cash value component are considered assets, particularly in legal proceedings such as divorce.
Though cash value insurance is technically an asset, that doesn’t make it a wise investment option for everyone. Read on to see why it’s best to think of a life insurance policy as a financial tool that complements your other investments.
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An asset is a resource that you invest money into with the hope of receiving a return on your investment.
Common tangible assets include real estate, precious metals, art, and other collectibles. For the majority of homeowners, their house is their primary asset, and they expect to make a profit when they eventually sell it.
Financial assets include stocks and bonds, retirement accounts like a 401(k) or IRA, and cash or cash equivalents, such as a savings account. Like tangible assets, financial assets usually increase in value over time. The rate of return (or how much money your investment earns) varies from asset to asset.
A term life insurance policy lasts for a set period of time (usually between 10 and 30 years) and pays out a death benefit to your beneficiary if you die while your policy is active.
Strictly speaking, term life insurance is not an asset. With an asset, the whole point is to collect a payout in the future. But when it comes to life insurance, you’re hoping not to get the payout (because, of course, that would mean you had died prematurely). Instead, you’re paying to guarantee that your dependents will be protected from financial hardship in case the worst happens.
The reason why you want to buy a term policy in addition to your assets is because most assets take decades to appreciate into their full value. If you die before your investments have matured, the death benefit of a life insurance policy will likely be greater than the worth of your assets, and will provide more support to your dependents.
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With whole life insurance, a certain portion of the premiums you pay go into a tax-deferred savings component, called the cash value of the policy. (The exact amount that goes into savings is determined by your individual policy.) Because the policy's cash value grows over time and acts similar to an investment, it will be counted in the value of your estate. This is especially relevant if your assets will be subject to an estate tax.
Term life insurance — which lacks a cash value component — won’t be considered an asset in a divorce. However, a whole life policy, or any other form of cash value life insurance, will be.
If you have a cash value policy, you’ll need to list it as an asset when dividing property during a divorce process. That includes joint or survivorship policies, which are permanent policies that insure two people. Though you may be able to split a joint policy into two separate policies in the event of divorce, you’ll still need to count it as an asset first.
Though the cash value of whole life insurance may qualify as an asset, for most people, a whole life policy isn’t a good investment.
Whole life and other cash value policies come with limited investment options and relatively low rates of return. Over the long run, dedicated investment vehicles—such as a mutual fund, 401(k), or IRA—will likely provide better returns than a whole life policy. Depending on your insurer and how long you’ve had the policy, the cash value of a whole life policy may also be subject to additional expenses and fees when you withdraw the money.
On top of that, whole life insurance policies generally cost 6 to 10 times as much as comparable term life policies. That’s why many financial advisors recommend that you “buy term and invest the difference” when it comes to life insurance.
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