Is a Life Insurance Policy Considered an Asset?

Life insurance policies primarily protect beneficiaries after the policyholder’s death. However, some policies also function as financial assets during the policyholder’s lifetime. An asset is something owned with economic value that can be converted into cash, clarifying how certain life insurance policies provide both protection and accessible value within a financial portfolio.

The Nature of Life Insurance as an Asset

While the death benefit provides financial security to beneficiaries, it is not an asset to the policyholder during their lifetime, as it is a future payout not directly accessible by them. However, certain life insurance policies include a savings component known as “cash value” which accumulates over time and is considered an asset. Cash value grows as a portion of each premium is allocated to a savings component, earning tax-deferred interest or investment returns. This accumulated cash value distinguishes these policies, allowing them to function as a living asset that the policyholder can access or leverage.

Policy Types and Asset Accumulation

Life insurance policies generally fall into two broad categories: term life insurance and permanent life insurance. Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years, and typically does not build cash value. Because term policies lack this savings component, they are not considered assets to the policyholder during their active term.

Conversely, permanent life insurance policies are designed to provide coverage for the insured’s entire lifetime and include a cash value component. Examples of permanent policies include whole life, universal life, and variable universal life insurance. In a whole life policy, the cash value grows at a guaranteed rate, providing predictable accumulation. Universal life policies offer more flexibility in premiums and death benefits, with cash value growth often tied to interest rates declared by the insurer. Variable universal life policies allow the cash value to be invested in sub-accounts, similar to mutual funds, offering potential for higher returns but also carrying market risk.

Accessing a Policy’s Asset Value

The cash value in a permanent life insurance policy can be accessed by the policyholder through several mechanisms.

Policy Loans

One common method is a policy loan, where the policyholder borrows against the cash value. These loans typically do not require a credit check and often have lower interest rates than conventional loans, with flexible repayment schedules. However, any outstanding loan balance and accrued interest will reduce the death benefit paid to beneficiaries if the loan is not repaid before the policyholder’s death.

Partial Withdrawals

Withdrawals can be taken from the cash value, generally tax-free, up to the amount of premiums paid into the policy. Any withdrawals exceeding the total premiums paid may be subject to income tax. Withdrawals will reduce the policy’s cash value and can decrease the death benefit.

Policy Surrender

Finally, a policyholder can surrender the policy for its cash surrender value. This action terminates the insurance coverage, and the policyholder receives the accumulated cash value minus any surrender charges, outstanding loans, or fees. Surrender charges are typically higher in the early years of a policy and decrease over time.

Life Insurance as an Asset in Financial Planning

The cash value can serve various purposes within a financial plan. It can be used as collateral for external loans, providing a readily available asset to secure financing without liquidating other investments. This collateral assignment means the lender has a claim to the policy’s cash value if the loan defaults.

In estate planning, while the death benefit passes to beneficiaries, the cash value can also influence financial decisions. The policy’s cash value, separate from the death benefit, is considered part of the policyholder’s net worth, relevant when assessing overall assets for distribution.

Life insurance policies, especially their cash value, also receive certain protections from creditors and in bankruptcy. Many states provide exemptions that shield a portion or all of a policy’s cash value from creditors or in bankruptcy proceedings. The extent of this protection varies significantly by state law and policy type, with term life insurance generally being fully exempt due to its lack of cash value. However, if a policy is transferred shortly before a bankruptcy filing or if there are outstanding policy loans, these protections may be impacted.