Do You Count Life Insurance in Net Worth?

Net worth is a fundamental financial measure, representing the total value of an individual’s assets minus their total liabilities. It provides a snapshot of financial health, indicating what someone owns after accounting for what they owe. Many assets, such as real estate, investments, and bank accounts, are straightforward to include in this calculation. However, life insurance often introduces a point of confusion when assessing one’s personal net worth.

Cash Value Life Insurance and Net Worth

Certain types of life insurance policies can contribute to an individual’s net worth because they accumulate a cash value over time. These are generally known as permanent life insurance policies and include types such as whole life, universal life, variable universal life, and indexed universal life insurance. A portion of the premium payments for these policies is allocated to a cash value component, which grows on a tax-deferred basis. This accumulated cash value is considered an asset because the policyholder can access it during their lifetime.

This cash value can be accessed through withdrawals, loans, or by surrendering the policy. Policyholders can typically withdraw money up to the amount they have paid in premiums without incurring taxes. However, withdrawals exceeding premiums paid or outstanding loans upon policy lapse may be subject to ordinary income tax.

It is the cash surrender value of these policies that is relevant for net worth calculations, not the death benefit. The cash surrender value is the amount a policyholder receives if they cancel the policy, which is typically the accumulated cash value minus any applicable surrender charges or outstanding loans. These charges can be substantial, especially if the policy is surrendered in its early years, but they often decrease over time. This distinction is important because the death benefit, while a future financial protection, is not an accessible asset during the policyholder’s lifetime.

Term Life Insurance and Net Worth

In contrast to cash value policies, term life insurance policies are generally not included in a personal net worth calculation. Term life insurance provides coverage for a specific period, typically ranging from 10 to 30 years, and does not build any cash value. This type of policy functions purely as a protective measure, paying a death benefit only if the insured dies within the specified term.

Since there is no savings or investment component that the policyholder can access or borrow against while alive, term life insurance does not represent an asset contributing to personal net worth. Its value is solely in the financial protection it offers to beneficiaries upon the insured’s death within the policy term.

Valuing Life Insurance for Net Worth Calculations

Determining the value of life insurance for net worth purposes primarily involves identifying the current cash surrender value for policies that accumulate it. For cash value life insurance policies, such as whole life or universal life, the current cash surrender value can typically be found on the policy’s annual statement. If the statement is unavailable or unclear, policyholders can contact their insurance provider directly or consult with a financial advisor to obtain this figure. This value represents the amount that would be received if the policy were terminated, after any fees or outstanding loans are deducted. This cash surrender value can fluctuate based on policy performance, withdrawals, loans, and the imposition of surrender charges, particularly in the initial years of the policy.

Beneficiaries and Life Insurance Payouts

The death benefit of a life insurance policy, whether from a term or cash value policy, is a sum paid to designated beneficiaries upon the policyholder’s death. This benefit generally does not contribute to the policyholder’s personal net worth while they are alive. The purpose of the death benefit is to provide financial security to survivors, rather than to serve as an accessible asset for the policyholder during their lifetime.

Life insurance proceeds typically pass directly to the named beneficiaries, often outside of the probate process. This means the funds are usually distributed directly by the insurance company to the beneficiaries without becoming part of the deceased’s probate estate, which can offer a quicker payout and bypass some administrative complexities. While the death benefit is a significant part of an individual’s overall financial legacy, it is not a component of their living net worth calculation.