When Is Life Insurance an Asset?

Life insurance can be part of a well-rounded financial plan. But is life insurance an asset? The answer can depend on which type of policy you have. Term life insurance and permanent life insurance offer two very different options for coverage. One can build cash value; the other doesn’t. If you have life insurance or you’re considering buying a policy, it helps to know when it can be considered a financial asset.

A financial advisor can offer valuable guidance as you consider your life insurance choices.

Life Insurance Basics

Life insurance is designed to pay out a specified death benefit to your named beneficiary or beneficiaries when you pass away. You purchase a life insurance policy from an insurance company. In return for a premium, the insurer maintains your policy’s coverage.

Generally speaking, life insurance falls into one of two categories. You can choose between term or permanent coverage. Term life insurance covers you for a set time period. So you may have a term policy that lasts 20, 25 or 30 years, for example. You pay in regular monthly premiums and once the term expires, your coverage ends.

Permanent life insurance is designed to remain in force for the insured’s lifetime when the policy’s requirements are met. Depending on the contract, keeping coverage active can require sufficient premium payments or enough policy value to cover ongoing insurance costs. Permanent policies can also build cash value, which gives them a financial component that term coverage generally does not have.

What Is an Asset?

An asset is something of value that you own. Assets are frequently discussed when you’re talking about net worth, meaning the difference between what you own and what you owe. To calculate your net worth, you’d add up all of your assets and all of your liabilities, then subtract liabilities from assets.

Liabilities are amounts or obligations you owe. So liabilities might include things like:

A mortgage
Student loans
Vehicle loans
Business loans
Personal loans
Credit cards

Assets, on the other hand, are things that hold real value. So your list of assets might include:

Bank accounts
A home
Investment accounts
Retirement accounts
Land
Heirlooms or antiques
Gold
Cryptocurrency

When you have more assets than liabilities, you have a positive net worth. On the other hand, you can have a negative net worth if your liabilities exceed your assets.

Is Life Insurance an Asset?

Whether life insurance counts as an asset generally depends on what the policy gives its owner access to while the insured is alive. Term insurance typically provides a death benefit for a specified coverage period without accumulating cash value. Permanent policies can build value that the owner may be able to access, making the policy an asset with a measurable value during the insured’s lifetime.

Cash value does not simply equal the premiums paid into a permanent policy. Insurance costs, fees and other policy charges can affect how much accumulates. The available value and the way it grows depend on the type of contract and its terms.

Cash value life insurance policies aren’t the same in terms of how your money grows. Your options for choosing a cash value policy include:

Whole life. A whole life insurance policy generally follows a scheduled premium structure and can include guaranteed cash values and a guaranteed death benefit, subject to the policy’s terms. Some policies may also pay dividends, although dividends are not necessarily guaranteed.
Universal life. A universal life insurance policy typically offers more flexibility in premium payments and death benefits than whole life. Interest credited to the policy can affect its cash value, while insurance charges are deducted from the account. Indexed universal life policies determine interest credits in part by reference to an external market index, subject to the contract’s limits and guarantees.
Variable life. With a variable life policy, policy value can be allocated among investment options offered through separate accounts. Market performance can raise or lower the cash value, so the investment component exposes the policy owner to greater fluctuation than a traditional whole life policy.

Cash value inside a life insurance contract generally receives tax-deferred treatment while it remains in the policy. That does not mean every transaction involving the cash value is tax-free. The tax result can depend on how money is accessed, the owner’s investment in the contract and what later happens to the policy.

You may decide to use the cash value to pay for your policy premiums. Whether this is available and how it affects the policy depends on the contract. Using policy value to cover insurance costs can reduce the amount available for other purposes and insufficient value could require additional premiums to keep coverage active.

A withdrawal can provide access to part of a policy’s value, but it can also reduce the cash value and may lower the death benefit. Tax consequences can arise in some circumstances, so the amount received should not automatically be treated as tax-free cash.

Taking a loan against a policy is another way to access value without surrendering the contract. Interest generally accrues on the borrowed amount. An outstanding balance can reduce what beneficiaries receive and allowing a policy with a loan to lapse or surrendering it can create tax consequences depending on the circumstances. Policy loans therefore should not be treated as equivalent to withdrawing money from a bank account.

Surrendering a policy can also create taxable income. Under federal tax rules, when the cash received upon surrender exceeds the owner’s investment in the contract, the excess is generally included in income.

When Is Life Insurance an Asset Worth Owning?

Life insurance is meant to provide financial protection for yourself and your loved ones. If you’re a primary breadwinner for your household, for example, you may want to avoid leaving your spouse or children in a tight spot financially. So that alone can make paying the premiums for life insurance worth it.

It’s important to remember that term life doesn’t generally build cash value. While some term life policies may include riders that allow you to tap into the benefit during your lifetime to pay for critical illness or long-term care, that’s different from accumulating cash value. The policy itself doesn’t become more valuable to you over time.

Purchasing permanent life insurance to build cash value could be worth it if you don’t mind paying higher premiums for coverage and you’re looking for ways to fill in gaps in your estate plan. On the whole, permanent life insurance tends to be more expensive than term life. So it’s important to be fairly certain that you need or want to be covered for your lifetime, as it can mean a higher overall cost.

It’s also important to compare the policy’s projected value with other places you could put the same money. Permanent life insurance combines insurance coverage with cash value, so evaluating it solely by its potential investment return can overlook the cost of the insurance component. Retirement accounts such as a 401(k) or IRA serve a different purpose and have their own contribution, withdrawal and tax rules.

Looking at your entire financial picture can help you decide if life insurance makes sense for you and whether it’s better to choose a term life or permanent life policy. Talking to your financial advisor or an insurance professional can also help with deciding how much coverage you might need.

How to Evaluate the Cash Value of a Life Insurance Policy

Start with the policy’s current statement rather than the original illustration. Look for the cash value, cash surrender value, death benefit, outstanding loan balance and any surrender charges. These figures can show what the policy is currently worth to you and how much money you could actually receive if you ended the coverage.

Next, compare what you are paying with what you still need from the policy. For example, someone who originally bought permanent coverage to protect young children may have different insurance needs 20 years later after the children are financially independent and the mortgage is smaller. A continuing need for lifetime coverage, estate liquidity or support for a dependent could lead to a different decision.

Review any policy loan before taking additional money out. Suppose a policy has $80,000 of cash value and a $25,000 outstanding loan. The $80,000 figure alone does not reflect the owner’s full financial position because interest can continue accumulating on the debt and an unpaid balance can reduce the eventual death benefit.

Also check the tax basis before surrendering a policy or making a large withdrawal. If the amount received from a surrender exceeds the owner’s investment in the contract, part of the proceeds can be taxable. Knowing the basis, surrender value and outstanding debt before making a transaction can help you estimate what you would actually keep after the policy is closed.

Replacing an existing policy also deserves careful review. A new policy can come with new underwriting, different costs and another surrender-charge period. Changes in age or health may also affect the price or availability of replacement coverage. Comparing the existing contract with the proposed replacement before canceling coverage can help identify the financial differences between the two policies.

Bottom Line

Life insurance can be considered an asset when a policy builds cash value that belongs to the policy owner. Term insurance generally does not have this feature, while whole life, universal life and variable life policies can. The value of a permanent policy depends on its contract terms, cash value, surrender charges, loans and other costs, so the death benefit alone does not indicate what the policy is worth as an asset today.

Life Insurance Tips

Consider talking to a financial advisor about whether life insurance is an asset you need to have inside your financial plan. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor, get started now.
Using a life insurance calculator can help you decide how much coverage you need. Once you decide whether term or permanent life insurance makes more sense, you can get life insurance quotes online. Remember that when it comes to cost, term life tends to be more affordable. But the premiums you’ll pay can depend on your overall health and lifestyle as well as the coverage options you choose.