Is Life Insurance an Asset?

Does Your Policy Have a Cash Value?

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Your net worth—a key measure of your financial health—compares your assets to your debts. Assets help you fund your goals, pay expenses, and absorb surprises, so the more you have, the better.

In some cases, life insurance is an asset. Life insurance provides a death benefit (or a lump-sum payout) when an insured person dies, and families often use insurance to prevent financial hardship in such a circumstance. When life insurance policies have a cash value, they might also serve as assets and have other uses as well.

What Is an Asset?

An asset is something you own or control, and assets typically have some type of value you can access. For example, you might have money in a bank account, real estate, or an automobile. Those assets might provide income, or they might simply be useful items.

Assets play an important role in your finances. Your assets can fund your goals and provide cash when emergencies arise. They can also store value, enabling you to sell the asset for money later. And in some cases, assets produce income or rise in value, which can increase your net worth.

Does Your Policy Build Cash Value?

To determine whether or not your life insurance policy is an asset, find out if the policy has a cash value. Only policies with cash value, known as permanent policies, are likely to be treated as assets. To accumulate cash value, you pay into your policy at a rate that exceeds the cost of providing pure life insurance. The excess amount goes into your cash value, and you can potentially use that cash value later.

Term insurance policies (which have no cash value) are also valuable—they provide essential life insurance protection. However, since term policies do not include a cash value you can access, they are not technically considered an asset. 

Which Types of Life Insurance Build Cash Value?

In addition to providing a death benefit, the cash value in permanent life insurance policies may be accessible via policy loans or withdrawals.

  • Whole life: Premiums on whole life insurance policies typically do not change over time. The death benefit and cash values may be guaranteed at issue, making these policies relatively predictable.
  • Universal life: Premiums are flexible with universal policies, which can be helpful as your budget changes. The cash value depends on how much interest the insurance company credits to your account, and you don’t know in advance how much you’ll earn.
  • Variable life: You can choose securities (mutual funds) to invest the cash value in with a variable life insurance policy. However, because values fluctuate constantly based on the performance of your investments (you can lose money), this is an asset that’s difficult to value.

Cash value life insurance has several tax features that may be useful during your life. The cash value accumulates tax deferred, and it may be possible to withdraw funds or borrow from your policy without creating a tax liability.

Using the cash value of a life insurance policy can have several unintended consequences. Tapping those funds can result in a loss or reduction of coverage, you may have to pay surrender charges to your insurance company, and you may owe taxes, depending on the situation. Review the strategy with your CPA and insurance agent before doing anything.

Why It Matters Whether Your Life Insurance Is an Asset

Assets give you options, but also require special consideration when it comes to certain situations. Here are a few examples.

Divorce or Bankruptcy

Any situation that requires an honest assessment of your assets requires accounting for any permanent life insurance policies. For example, a divorce agreement might require that participants split assets, and the cash value of a life insurance policy could be included.

Collateral for a Loan

You can also use life insurance as collateral for a loan in some cases, making it easier to get approved. This is referred to as a collateral assignment—if you die before paying off the loan, the lender receives the remaining balance from your death benefit, with your beneficiaries receiving what’s left.

You May Be Able to Sell Your Policy

A life insurance policy can potentially help pay for long-term care and other expenses as well via a life or “viatical” settlement. These arrangements are typically available if you’re older or have a limited life expectancy. In either case, a company purchases your policy for a set amount that you can use for any purpose (life settlement) or for long-term care expenses (viatical settlement).

If you are terminally ill, you might be able to sell your policy in a viatical settlement. In this case, a settlement company pays a percentage of the death benefit to buy your policy. You get policy funds to use while you’re still alive, the company gets the death benefit once you pass. 

But your heirs can suffer if you use this type of arrangement—you get a reduced payout, and you may spend the entirety of that money on end-of-life care. That may be a worthwhile tradeoff, but it’s critical to understand that you’re giving up your death benefit.

Early-Access to the Death Benefit

If your policy features an accelerated death benefit, you might be able to receive funds from the policy, as a sort of cash advance, before death to use toward long-term care or end-of-life care. However, any money you receive will reduce your death benefit. You can also transfer funds from a life insurance policy to an asset-based long-term care policy if you want to buy long-term care insurance.

Selling or transferring a life insurance contract is complicated and may result in taxation.

Alternative Investments to Life Insurance

Though life insurance is often a good investment, be aware that accessing funds within your policy may be cumbersome—for example, you might need to fill out paperwork (and wait for processing) to borrow from your policy or make a withdrawal. And accessing the cash value can increase the risk of a potential lapse in coverage. 

With other investment options, you can often set up withdrawals and transfers online or liquidate your entire account without repercussion if you need all of your money back.

If you’re primarily interested in a vehicle for growth or tax advantages, or to fund a specific purpose (like retirement, health care, or a child’s education), other types of investments may be more suitable.

Investing for Growth

If your goal is to grow your assets over the long term, consider investments with different risk and reward profiles. Permanent life insurance policies tend to behave like conservative investments (except for variable life policies, which allow you to invest in higher-risk securities).

To pursue long-term growth, you might use mutual funds or exchange-traded funds (ETFs) to build a diversified portfolio. You can choose how much risk is appropriate, given your circumstances, and select a mixture of stock and bond holdings that’s tailored to your goals.

Tax-Aware Investments

Several types of accounts help you manage taxes as you invest for the future. Retirement accounts, such as 401(k)s and traditional IRAs, allow you to reduce taxable income for the years you contribute, while Roth IRAs allow you to take tax-free withdrawals in retirement. 

If you have a qualifying high-deductible health plan, a health savings account (HSA) might provide triple-tax benefits that help reduce the cost of health care: Eligible contributions are deductible, growth in the account is tax-deferred, and qualifying withdrawals come out tax-free.

Key Takeaways

  • Permanent life insurance policies can build a cash value, and may function as an asset.
  • Term insurance is not considered an asset, but provides valuable benefits.
  • If your policy is considered an asset, you may be able to use it as collateral for a loan or sell it, or you may have to consider it during divorce negotiations.
  • Being able to access the cash value is an advantage of permanent life insurance, but doing so can result in tax consequences or even a loss of coverage.
  • Depending on your goals, other types of investments may better serve to increase your net worth or fund those goals.