Is Life Insurance Considered an Asset?

Whether life insurance is considered an asset depends on the policy type. It primarily serves as a financial protection tool, providing a payout to beneficiaries upon the insured’s death. This benefit can help cover various expenses, from daily living costs and mortgage payments to educational funding or outstanding debts. A policy is classified as an asset if it accumulates an accessible cash value over time.

Understanding What an Asset Is

An asset is something owned that has economic value and can be converted into cash. Examples include real estate, savings accounts, and investment portfolios like stocks or bonds. These items contribute to an individual’s net worth because they can be used to generate income or provide financial resources. An asset provides a future economic benefit to its owner.

Term Life Insurance and Its Asset Status

Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years. Premiums are paid solely for the death benefit, which is paid to beneficiaries if the insured passes away within the policy’s active period. This policy type does not accumulate cash value or an investment component.

Since it lacks a savings or investment element, it builds no redeemable value accessible to the policyholder during their lifetime. Its value is contingent on the death benefit being paid upon the insured’s passing within the specified term. Therefore, term life insurance is not considered an asset, as it does not contribute to the policyholder’s net worth or provide a living benefit.

Cash Value Life Insurance as an Asset

Unlike term policies, certain life insurance policies accumulate a cash value component over time, functioning as a living benefit accessible to the policyholder. These permanent life insurance policies include types such as whole life, universal life, and variable universal life. A portion of each premium is allocated to this cash value, which grows on a tax-deferred basis, meaning taxes on gains are not due until withdrawal.

This accumulated cash value represents an asset because the policyholder owns and can access it while alive. Its growth provides a source of funds for various financial needs, increasing the policyholder’s net worth.

Accessing the Cash Value

Policyholders can access the accumulated cash value in a permanent life insurance policy through several methods. One option is taking a policy loan, where the policyholder borrows against the cash value. These loans accrue interest and, if not repaid, the outstanding loan amount and accrued interest will reduce the death benefit.

Another method is making a withdrawal from the cash value, which directly reduces the policy’s cash value and death benefit. The policyholder can also surrender the policy, terminating coverage entirely. In exchange, the policyholder receives the cash surrender value, which is the accumulated cash value minus any outstanding loans, interest, or applicable surrender charges.

Tax Considerations of Cash Value

The cash value within permanent life insurance policies grows on a tax-deferred basis, meaning taxes are not paid on investment gains as they accumulate. This allows the cash value to compound more efficiently. When accessing cash value through withdrawals, a “first-in, first-out” (FIFO) rule applies: withdrawals up to the amount of premiums paid are considered a return of principal and are tax-free.

However, withdrawals exceeding total premiums paid may be subject to ordinary income tax. Policy loans taken against the cash value are tax-free as long as the policy remains in force. If the policy lapses or is surrendered with an outstanding loan, the loan amount exceeding premiums paid can become taxable income. When surrendering a policy, any amount received exceeding total premiums paid is considered a taxable gain.