If you own a life insurance policy or are thinking about purchasing one, where does it fit on your balance sheet? You have to pay a monthly, quarterly or annual premium, so is it a liability? It might seem that way, but the answer is it depends on the type of insurance policy you own. Here’s what you need to know to determine if life insurance is an asset or a liability.
Life Insurance as a Liability
Any type of life insurance that doesn’t earn cash value is considered a liability. The most common type of non-cash value life insurance is term life insurance. With a term policy, you owe regular payments and you’re not guaranteed anything in return. If you outlive the term of your policy, your insurance company pockets the insurance premiums. Term life insurance only pays out a death benefit if you die within the specified term.
Life Insurance as an Asset
Any type of life insurance that earns cash value is considered an asset. Whole life and universal life are two of the most common cash value life insurance policies. With these policies, you owe regular payments but you also build cash value you can access at any time in the form of tax-free policy loans or withdrawals. These types of policies are considered permanent life insurance and pay a guaranteed death benefit, regardless of when you pass away, as long as premiums are paid. What’s more, whole life and universal life generate passive income, either through a guaranteed rate of return or based on market performance of certain indexes or sub-accounts. And whole life policies from mutual insurance companies pay non-guaranteed dividends.
This passive income growth is what sets permanent life insurance apart as an asset, and it can be used for a number of purposes, including funding a tax-free retirement. Whole life insurance in particular is able to grow wealth without the risks associated with market-based investments, shielding retirees against market volatility. And if you plan on retiring early, the cash value in a whole life insurance policy provides liquidity without penalties for withdrawal before 59 ½.
Why Whole Life Insurance is Considered an “AND” Asset
Whole life insurance is a unique asset in that you can both borrow your cash value AND earn money on it at the same time. Say you have $50,000 in cash value and you take out a tax-free policy loan for $25,000 to buy a car. Most savings accounts would only earn interest on the remaining $25,000 in your account. But with cash value in a whole life insurance policy, you’ll continue to earn interest on the full $50,000 — the cash value of your account.
For this reason, not only is whole life insurance an asset, it might be the most valuable asset on your balance sheet.
How Your Policy Protects Other Assets
On top of being a valuable asset, whole life insurance works to protect other assets. Because an insurance policy is a private contract between you and your insurance company, it’s often protected from litigation and claims from creditors. When you need a loan, you can borrow from your insurance company instead of through a bank and use your policy as collateral. You can take out insurance policies on yourself and key employees/business partners to help protect your business and generate business capital. You can hold policies in an irrevocable trust to help protect your estate and avoid or lower estate taxes. These are just a few of the ways whole life insurance helps grow and protect your wealth.
If you’re considering life insurance, a free consultation with a Paradigm Life Wealth Strategist can help answer your questions and illustrate the benefits of cash value insurance as they pertain to your unique financial goals and your family’s budget. Is life insurance an asset or a liability? It depends on the policy — make sure you choose the right one.