More on Life Insurance
More on Life Insurance
Updated September 11, 2020
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An asset is a resource in which you invest money with the hope of receiving a return on your investment. Most people have tangible assets, like a home and other valuable items, and financial assets, including retirement and savings accounts (or a life insurance retirement plan), which you hope gain value over time.
But is a life insurance policy an asset? It depends: term life insurance, which is meant to only protect your dependents in the event of your 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. It’s best to think of a life insurance policy as a financial tool that complements your other investments.
An asset is an investment on which you hope to receive a return, like stocks or real estate
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, particularly in divorce proceedings or mortgage underwriting
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. Term life insurance is not considered an asset.
The point of an asset is to collect a payout from it in the future. With life insurance, you’re hoping the policy won’t pay out (because that would mean you had died prematurely). Instead, you pay life insurance premiums to protect your dependents from financial hardship in case the worst happens.
If you become old or ill enough to sell the policy for a profit, then those earnings become a financial asset. If your total assets equal $11.7 million or more, your insurance proceeds may be treated as an asset for your beneficiary and included in the calculation for estate or inheritance tax purposes. But a term policy isn’t an asset while you’re living and own your policy.
You should buy a term policy in addition to your assets because most assets take decades to appreciate in 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. A life insurance calculator can identify how much coverage you need to fill the gap while your investments grow.
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Unlike term life insurance, whole life insurance and other forms of cash value life insurance are considered assets, particularly in certain legal proceedings, like divorces.
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.
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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. Whole life insurance is also five to 15 times more expensive than comparable term life policies.
“In the vast majority of cases, an investor is better off purchasing term life insurance to receive the benefits of a life insurance policy,” says Levi Sanchez, a financial planner and founder of Millennial Wealth, LLC. “The investor could instead invest the difference between the fees associated with permanent life insurance and term insurance and end up better off. Other tax advantaged accounts, such as 401(k)s, IRAs, and HSAs, could all be maxed out prior to even considering the 'tax-efficiency' of a permanent life insurance policy.”
Term life insurance won’t be considered an asset in a divorce because it lacks a cash value component. 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. 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 a divorce, you’ll still need to count it as an asset first.
The easiest way to identify whether your policy is an asset is to consider whether you stand to profit from it while you’re alive. Except in circumstances like selling your policy, you can’t profit from term life insurance, which is not typically considered an asset. But a policy that earns interest on a cash value that you can access while you’re alive may be counted as an asset. If you’re unsure, a licensed financial adviser can clarify the particulars of your situation.
Your assets are anything you own that could potentially increase in value and become profitable. That includes personal property, like a house, as well as intangible things like investments and savings.
Term life insurance is not an asset because the death benefit typically pays out only after you die. A permanent policy with a cash value may be counted as an asset, especially in divorce proceedings or during mortgage underwriting, because the cash value earns interest and you can withdraw from it while you’re alive.
The cash value of a permanent policy is part of your net worth. While you’re alive, term life insurance is not part of your net worth. After you die, the proceeds are included in your net worth for inheritance or estate tax purposes.
Cash value life insurance is not the best investment for most people. You will typically receive a greater return from investing in a traditional account like an IRA or 401(k).
Amanda Shih is a life insurance editor at Policygenius in New York City. She has a passion for making complex topics relatable and understandable, and has been writing about insurance since 2017 with specialities in life insurance cost and policy types. She's previously written for Jetty and LegalZoom.
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