Only 54% of the United States population has life insurance. Many do not understand how valuable life insurance coverage is in providing emotional and financial security to themselves and their family.
Maybe you’re wondering, is life insurance an asset? The short answer is yes. We are going to share everything you need to know before making an investment. Once you are ready to invest, shopping for a life insurance policy and getting cost comparisons is easy. Keep reading to learn how.
What Is an Asset?
An asset is something that adds value. There are two types of assets:
- Tangible—an asset you can touch, such as real estate, mutual funds, bonds, cash, inventory
- Intangible—an asset you cannot touch, such as copyrights, domain names, usage rights, trademarks, buy-sell agreements, and patents.
Another way of looking at types of assets is whether they are financial—bonds, cash, stocks, etc., or real—real estate, collectibles, etc.
Is Life Insurance an Asset?
Life insurance, depending on the type, is a financial asset. Many think of insurance as a liability because you are constantly paying premiums to insure your home, health, vehicle, etc.
When a life insurance policy generates an increase in value, it becomes an asset. Not all life insurance meets this classification. When planning to buy life insurance, review your options.
Types of Life Insurance
Life insurance is an asset or liability depending on the type of coverage. Before you buy, review all selections and choose a policy that meets your needs. Here is a quick overview of the options:
Term Life Insurance
This is the most basic and usually least costly life insurance. You select a death benefit amount and a period of coverage, such as 30 years. Your premium is based on coverage plus lifestyle, age, health, and work.
Once the policy expires it either ends or you can renew it. When you renew the premium will likely increase because you are older. You pay premiums throughout the coverage period, but there is no cash value. If you die while the policy is active, your beneficiaries will receive payment of the death benefit. Once the policy expires, there is no payout. All premiums are paid to remain with the insurance company.
Term life insurance is not an asset, because it does not accrue value. It only has value, a death benefit, if you die while the policy is active.
Whole life insurance is also called permanent coverage. There are various types of whole life policies, each with its own benefits. All whole life policies are an asset.
Standard Whole Life
This insurance incorporates a savings component into the permanent life protection. As long as you do not allow your premiums to lapse, you will maintain the same premium rate throughout the policy. The death benefit never decreases, and the policy accrues cash value.
This policy is similar to standard whole life and has the benefit of earning cash value on its savings component. The policy contains a lot of flexibility. Premiums you pay can be increased, deferred, or decreased and you are able to withdraw the cash value.
This type of insurance provides you with a fixed premium plus control over the cash value. The cash value the policy accrues is invested into your choice of bonds, money market funds, or stock.
Depending on your investment choices the cash value and death benefit may vary depending on the investment performance. If you leave the capital gains and other investment earnings in the insurance contract, they will accrue tax-deferred.
Universal Variable Life
This is a very aggressive type of policy. You can make decisions about the investments made into mutual funds. Because investment values vary, there is no guarantee of the cash value going beyond the death benefit face value.
The Benefits of Life Insurance Assets
The face value of your life insurance policy provides your beneficiaries with financial security. It gives them cash to use for payment of your funeral costs, pay off your debts, and provides for their loss of your income. Here are some other benefits:
Death Benefit Is Tax-Free
If life insurance is paid directly to a beneficiary it is not taxable. This means your beneficiaries will not have to pay income tax on the lump sum payment they receive upon your death.
The only time this does not apply is if the death benefit results in your estate exceeding the federal estate tax exemption limit. The other exception occurs if your estate is your beneficiary and you do not have your assets in a living trust.
Tax-Free Loans Against Policy
Once your policy accumulates a cash value, you can borrow money from the insurance company’s general account by using your cash value as collateral. The Internal Revenue Code states that policy loans are not income and are not subject to income tax.
You do need to be aware that if you surrender the policy or it lapses it may be subject to tax. If the outstanding loan amount exceeds what you have paid, you will receive a Form 1099-R. You will owe tax on the loan plus interest at your normal tax rate.
Tax-Deferred Cash Value Growth
The cash value of a whole life insurance policy grows tax-deferred. The cash value growth is guaranteed. You will not be taxed on the growth if you use policy loans.
Retirement, Social Security, and Income Tax
When you reach a certain age in retirement you will be required to take a required minimum distribution (RMD) from taxable investment accounts. You will pay tax on your RMDs as well as your Social Security income.
If you purchase whole life insurance policies instead of investments, you can allow their cash value to build. You will be able to draw off the cash value in retirement tax-free. Withdrawing funds from your cash value lowers the amount of your life insurance payout upon death.
Changes in the U.S. IRS Tax Code §7702 make a distinction between life insurance policies and investments that appear to be life insurance. These changes ensure that tax deferments are only given to legitimate life insurance policies.
If the policy does not meet the government definition of a life insurance policy, the proceeds are taxable as ordinary income. Taxation is annual, even if you do not withdraw money.
Another change allows you to put more money into permanent life insurance policies, using them as an asset-building device.
Life Insurance Is a Solid Investment
No other asset guarantees you cash value growth that increases your death benefit payout. The older you get, the larger your death benefit will be. The value of whole life insurance provides you with a solid investment option.
The cost of life insurance is minimal in comparison to the financial security it provides your family. When shopping for insurance, know the coverage you need, then compare options and pricing to get the best bang for your buck.
Where to Find Life Insurance
Knowing the answer to “is life insurance an asset?” probably has you wondering where to find life insurance that qualifies as a tax-deferred asset. LifePlans.com provides a price comparison service that is 100% free and fast. You receive custom results with quotes from several companies.
Just call us at (855) 441-1312 for a quote, or use our online life insurance calculator to receive answers to all your life insurance questions and a recommendation on coverage. Get your quote today!