Is Life Insurance Included in Net Worth?

Net worth is a financial snapshot reflecting an individual’s financial health at a specific moment. The inclusion of life insurance in net worth depends on the policy’s structure and the specific components it offers.

Core Components of Net Worth

Net worth is determined by subtracting liabilities (what an individual owes) from assets (what they own). Assets encompass anything of monetary value, such as cash in bank accounts, investments, real estate, and valuable personal property like vehicles or jewelry. Conversely, liabilities represent financial obligations or debts, including mortgages, credit card balances, student loans, and car loans. A positive net worth signifies that assets exceed liabilities, while a negative net worth indicates the opposite.

Life Insurance and Its Net Worth Status

Whether life insurance is included in net worth depends on if the policy accumulates a cash value. Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years. This type of policy does not build a cash value component and is not considered an asset in net worth calculations. It solely offers a death benefit to beneficiaries if the insured passes away within the policy term.

In contrast, cash value life insurance policies, such as whole life or universal life insurance, include a savings component that accumulates value over time. A portion of each premium payment is allocated to this cash value account, which grows on a tax-deferred basis. This accumulated cash value is considered an asset because the policyholder can access it during their lifetime, often through withdrawals, loans, or by surrendering the policy. Therefore, the cash value component of these policies is included in net worth calculations.

Calculating Life Insurance in Your Net Worth

To incorporate life insurance into a net worth calculation, focus on the policy’s cash surrender value. This is the amount a policyholder receives if they cancel their permanent life insurance policy before its maturity or an insured event occurs. The cash surrender value is typically the accumulated cash value minus any surrender fees or outstanding policy loans. Policyholders can find their current cash surrender value by checking their policy statements or contacting their insurance provider directly. Once obtained, this figure is added to other assets when compiling a personal net worth statement. For example, if an individual has $500,000 in investments, $200,000 in real estate equity, and a life insurance policy with a cash surrender value of $30,000, the total assets would include this $30,000.

Death Benefit Considerations for Net Worth

It is important to differentiate the cash value from the death benefit when considering net worth. The death benefit is the sum paid to beneficiaries upon the policyholder’s death and is not considered part of the policyholder’s net worth during their lifetime. The policyholder cannot access or utilize it while alive. Upon the policyholder’s death, the death benefit payout becomes an asset for the named beneficiaries, increasing their net worth, not the deceased policyholder’s. While the cash value component of certain life insurance policies contributes to an individual’s living net worth, the death benefit serves as a future financial resource for beneficiaries.