Life insurance as a financial asset

The death benefit of a life insurance policy is not considered an asset, but some policies have a cash value, which is considered an asset. Only permanent life insurance policies, like whole life, can grow cash value.

Is life insurance an asset?

The primary goal of life insurance is to provide financial stability for your family and/or your beneficiaries after you’re gone, through a lump-sum payment called a death benefit or a life insurance benefit. There are a number of different types of policies you can purchase and many different amounts of coverage you can choose. You could have a small policy simply to cover end-of-life expenses, or you could have a much larger policy to ensure that your family can live comfortably for years, even without your income, as long as you keep the policy in force.

But there is a feature of certain types of life insurance policies that can be counted as an asset. Cash value can be used in a variety of ways to help with liquidity and estate planning. But before we jump into that, let’s cover some basics.

What is an asset?

There are a couple of different definitions of the word “asset.” Anything useful or beneficial to you can be considered an asset. In the financial sense, however, assets are things of monetary value that you own at a moment in time. Tangible assets are generally things like a home, a car, or even gold. Liquid assets can be money in a bank account, stocks, or holdings in investment accounts. The opposite of an asset is a liability, or a debt—money that is owed.

The main benefit of life insurance does not count as an asset

This is almost always a good thing. Any debt that you owe when you die must be paid off before your remaining assets can be distributed to your heirs. Since the death benefit of a life insurance policy isn’t considered an asset, it can’t be earmarked to pay your debts, and your beneficiaries will receive the complete amount. After your beneficiaries receive it, the benefit will be considered a liquid asset of theirs.

How is the cash value of life insurance an asset?

Some types of permanent life insurance have an additional living benefit, called cash value. If your life insurance policy accumulates cash value, the cash value is considered an asset, because you can access it. Doing so might reduce the death benefit and the available cash surrender value, however. There may also be surrender charges.

Is term life insurance an asset?

No. Term life insurance is designed for temporary coverage. It lasts for a set amount of time, usually 10 to 20 years. The premiums tend to be much lower than the premiums for permanent life insurance, but a term policy does not accumulate cash value, and once your term expires, your coverage may end or start increasing in price. Term life insurance can be extremely valuable to your family and to your own peace of mind, but since it doesn’t create cash value, it doesn’t count as an asset.

How does life insurance work as an asset?

When you have the correct type of permanent life insurance, you can use the cash value it accrues in a variety of ways. It can help if you need funds for an emergency; it can also help with estate planning.

Types of permanent life insurance

Life insurance comes in many shapes and sizes, but the two main categories are term life and permanent life. Within the bucket of permanent life insurance, there are even more options, but the most common policies that can build cash value are:

Whole life insurance: It has a guaranteed¹ death benefit that will never decrease, as long as the premiums are paid. Your premiums will never change, so it’s a good long-term solution to provide stability.

Universal life insurance: It’s more flexible and generally has lower premiums. You can adjust the policy, and even the amount you pay, as your life changes, but that will cause the death benefit to fluctuate.

Building cash value

When you have a permanent life insurance policy that builds cash value, a small amount of each premium payment you make goes into the cash value. This cash value can grow tax deferred and can be accessed tax free if the policy is designed properly.

Cash value provides a source of funds while you’re still living

A life insurance policy is not a liquid asset. However, you can access your cash value while you’re alive, keeping in mind that doing so will reduce both the available cash surrender value and the death benefit. Depending on how you structure your policy and the premiums you’re willing to pay, you can also grow cash value more quickly, which can help in various ways during your lifetime and with estate planning.

When should you consider using life insurance as an asset?

If you have a high net worth, the cash value of life insurance can be used to help protect wealth and transfer it to heirs. That’s in addition to the death benefit. The right strategy can make it easier to split assets evenly among heirs or to pay off debts, so tangible assets (like a beloved home) don’t need to be sold. There are other benefits as well. The cash value provides funds should you need them. It can be particularly helpful during retirement, when your life insurance needs may decrease. You’ll be able to access your cash value before you dip into other retirement savings. Each person’s situation is different, and customizing your policy is key to getting the protection you want. Our agents can help you do that.

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¹Guarantees are based upon the claims-paying ability of the issuer.