Typically, the primary motivation for shopping for life insurance is to provide financial security for loved ones once you’re gone. However, depending on the policy you get, you may be able to take advantage of it while you’re still alive.
While not all life insurance can offer living benefits, some plans can allow you to grow cash value, which is treated as an asset. In this article, we’re going to examine the various types of policies available and whether they qualify as an asset. We’re also going to discuss the potential benefits of having life insurance as an asset and whether it’s an investment opportunity that makes sense for you.
What is an Asset?
Generally speaking, an asset is something that has value and can appreciate in value over time. Assets are separated into two distinct categories: tangible and intangible.
Tangible assets are often physical items, such as property, gold or collectibles. If an item will gain value over time, it’s considered a tangible asset. Financial properties also fall into this classification, such as stocks, bonds and CDs. Since your money will grow in these accounts, they are considered assets.
Intangible assets are much harder to define and quantify, but they can be highly valuable. Some examples of intangible assets can include copyrights, intellectual property and brand names. Since these items’ value can fluctuate based on various factors, they are not the same as tangible assets.
So, where does life insurance fit on that spectrum? If you get a whole life insurance policy, it would be considered a tangible financial asset since it accrues value over time.
As long as you make premium payments every month, your account will grow. Even better, the cash value of your insurance can accumulate interest, which helps it build faster.
Why Do Assets Matter?
When it comes to your financial health, you need to weigh your assets and your liabilities. As we mentioned, an asset is something that gains value. A liability is the opposite.
Financial guru Robert Kiyosaki puts it this way, “an asset puts money in your pocket, while a liability takes money out.” So, if you have more assets than liabilities, you are well off financially because you earn more money than you’re spending.
These calculations are necessary for determining your net worth. Alternatively, if you have more liabilities than assets, you will be in debt, which can create negative net worth.
So, since some types of life insurance can be considered an asset, they may be able to increase your net worth. This distinction can matter even more once you reach retirement, as you want as many money-making assets as possible to finance your golden years.
Which Types of Life Insurance Policies are Considered Assets?
Because not all plans are the same, some forms of life insurance are liabilities, not assets. Here’s a quick overview of the types of policies you can have and whether they qualify as assets.
Term Life Insurance
This kind of coverage is the simplest and easiest to understand. To set up a term life insurance policy, all you have to do is choose a death benefit and the policy’s length. For example, you may want a $50,000 payout to go to your beneficiary, and you want coverage for the next 30 years.
Based on that data and your age and overall health, the insurance company will determine your monthly rates. Compared to other plans, term insurance is much more affordable.
The reason for the lower cost is that you don’t get any value beyond the death benefit. So, if you don’t die before the term expires, neither your nor your beneficiary receive any money.
The way that term life insurance is structured means that it is a liability, not an asset. Even if you die while covered, the money doesn’t go to your estate to settle your debts.
So, there is no appreciation or chance of a return on your investment. For the most part, term insurance only provides peace of mind for both you and your beneficiaries.
Whole Life Insurance
Unlike term coverage, whole life insurance policies will cover you forever as long as you keep making premium payments. Most plans will expire around age 120, which means that there is little chance to outlive your insurance.
When you make a premium payment on whole life insurance, a portion of that money goes into a cash value fund. Over time, your contributions can make this fund grow. Also, many life insurance companies will invest that money and pay dividends as it builds.
The cash value component of whole life insurance means that it can be considered an asset. There are a couple of ways you can tap into the value of your account, so let’s break them down.
Cash Value Loans
You can borrow against your life insurance in the form of a collateral loan. These loans are beneficial because you don’t have to worry about your credit score or interest rates.
Since you’re borrowing money you’ve contributed, there is no risk involved. Also, if you plan to repay the loan, the extra cash will go back into the account, making it even more substantial.
Another advantage of these loans is that the insurance company underwrites the loan. This means the cash in the account still builds interest while the loan is in effect.
Once you retire, it may be more challenging to continue paying your life insurance premiums. Not only will they increase as you get older, but your income will be lower. Fortunately, you can use your cash value account to cover these payments.
Just be sure to monitor the funds so that you don’t wind up with a negative balance. If that happens, your coverage could lapse, which would nullify your death benefit.
To help manage your expenses during retirement, you want to have as many revenue streams as possible. You can set up an annuity account with your whole life insurance policy, which will pay out monthly until the funds run out. If you’ve been paying into the plan for decades, the annuity can potentially last for your whole retirement.
Paid-Up Additions (PUAs)
If you have more money to contribute to your policy, you can do so with a paid-up addition (PUA). These additions are like a mini version of whole life insurance, except more of the money goes toward the cash value. The more PUAs you add, the faster your funds can grow.
Overall, there are many different ways that whole life insurance can become an asset. However, before signing up for an account, it’s crucial to understand its advantages and disadvantages. We’ll get into those later on in the article.
Universal Life Insurance
This type of policy works similarly to whole life insurance, except it is even more of an investment vehicle. Here is an overview of the primary benefits that can come with universal life insurance.
Higher Contribution Limits
With a whole insurance plan, your premium payments are determined by the insurer. With a universal policy, you can put more money into your cash-value account by paying a higher premium.
The best part about this feature is that you can adjust your contributions however you like. For example, one month you may only pay enough to maintain coverage. The next month you might contribute as much as possible to make up the difference.
Variable Index Accounts
To make your money work harder, you can tie your account to the stock market. With a variable indexed policy, your funds will go up and down with the market.
Considering that the average return rate can be 6-10% annually, you can potentially make more with a variable policy than you could with standard whole life insurance. The downside, however, is that there is a chance you might lose money as well.
Adjustable Death Benefits
As your circumstances change, you may decide to lower or increase your death benefit. A universal policy allows you to do this without having to start over with a new plan.
Is Life Insurance a Good Asset to Have?
It’s always a good idea to have life insurance to protect the ones you love the most. However, when it comes to investing, the value of an insurance policy may not be as good as other options. Here are some questions to ask before deciding whether to use life insurance as an asset.
- How Much Can You Contribute? If you can only manage minimum monthly payments, it doesn’t make sense to open a whole or universal policy. Since term insurance is much cheaper, it might be a better alternative.
- Do You Have Other Retirement Accounts? Typically, a 401k or IRA will accrue more money over the long term than life insurance. Also, there are fewer management fees for these accounts, so you get to keep more of your money. That being said, if you’re already maximizing your contributions and have funds left over, a universal policy might be a good option.
- How Long Can You Contribute to Your Account? If you’re already close to retirement, there’s not enough time to build cash value. However, if you have 20 or 30 years to go, you can potentially create a substantial nest egg.
Contact NextGen Life Insurance Today
Buying life insurance can seem overwhelming at first because there are so many different coverage options. Let NextGen Life Insurance help by comparing plans and rates to find the one that fits your needs. Don’t wait until it’s too late; contact us today.