Life insurance can play an essential role in your overall financial strategy. But is it an investment? The answer depends on your policy. Term life and permanent life offer two distinct types of coverage. While term life insurance can create cash value, permanent life insurance cannot.

If you’re looking for a policy that fits your needs and wants to ensure that the policy you select can be used as an asset, only policies with a cash value should be considered. Generally, only permanent insurance can fall under this category – term insurance policies – which is usually cheaper and valid for a fixed number of years.

In this article, we will learn about Life insurance as an asset and its impact on your life!

What Is Life Insurance?

Life Insurance is a contract between the policyholder and the insurance company in which the insurer undertakes to pay a premium in the event of the insured person’s death or after a specified time. Life insurance can be divided into two categories:

Term life insurance provides coverage for a defined time. For example, you could have a term life insurance policy that covers you for 20, 25, or 30 years. You pay premiums monthly, and when the term ends, your coverage is over.

On the other hand, permanent life insurance gives coverage throughout your lifetime as long as you continue to pay your premiums. If you buy a term policy at 30, you could still be covered when you're 90, as long as you keep up with your premiums. In addition to the difference between term and permanent, there is another significant difference between the two types of life insurance: cash value accumulation.

What Is An Asset?

An asset is an item of value owned by you. Assets are often mentioned when discussing net worth, which is the difference between your assets and liabilities. The way to calculate net worth is to add your assets and liabilities and then subtract your liabilities from your assets. Assets are essential to your financial well-being. Your assets can help you achieve your objectives and provide cash flow when needed. They can also hold value, allowing you to sell them for cash later. In some instances, assets generate income or increase in value, increasing your net worth.

Life Insurance As An Asset

Life insurance is considered an asset if it generates cash value. What is cash value? When you buy a life insurance policy, some premiums may be put into a tax-advantaged savings account. This money can accrue interest and compound over time. It is called cash value because this money may be available to you either by taking out and giving up the policy or by taking out a claim against it. Options for choosing a cash value policy are the following:

Whole Life

Whole-life premiums do not vary over time, and the death benefit and cash value may be guaranteed. It’s the most common permanent life insurance that provides a death benefit and allows the policyholder to accrue cash value. This works because a percentage of the monthly premium paid is deposited into a “cash value account.” Think of it like an insurance policy that has a savings account component. The cash value accrues over time at the minimum guaranteed rate specified in your policy.

Universal Life

Like whole-life policies, universal life policies enable policyholders to build up an asset by earning interest they can borrow against over time. The main difference between universal life and whole life policies is that universal life policies are not fixed, meaning they can change over time. The cash value depends on the interest the insurance company lends to your account. You cannot predict how much you will earn in the future.

Variable Life

You can also select securities with a variable life policy. However, because values change constantly based on your investment performance (you may lose money), it is an asset that is difficult to value.

Tips To Use Life Insurance As An Asset

1. You can borrow from your policy by taking out a loan against the cash value. However, it is essential to read the fine print carefully if you choose to do so.
2. You can also withdraw funds from your policy, which are yours to keep, but you will need to pay taxes if your withdrawal is large enough to offset your investment gains.
3. Sometimes, you can also use your policy as collateral for your loan, which can help you get approved or get a better rate for the loan you are taking out.
4. You can also take advantage of "accelerated" benefits, which allow you to receive benefits during your lifetime if you have a life-threatening illness such as cancer, heart attack, or kidney failure. This option usually allows you to withdraw between 25% and 100% of the policy's value.
5. The cash value component of life insurance is in addition to the death profit, which is paid to beneficiaries upon the policyholder's death. The death profit provides financial security for dependents if the policyholder dies.
6. Ask your financial advisor if life insurance is something you should include in your plan. It doesn't have to be challenging to find an excellent financial advisor.

Bottom Line

Life insurance as an asset can be a question for many people. The answer to this question depends on your circumstances and what you expect from your life insurance policies. For example, a fixed-term life insurance policy that accumulates cash value may be considered as an asset because the value of the policy may appreciate over time. A cash-value life insurance policy can also be regarded as a liquid asset because it can be borrowed or withdrawn from the policy at any time. To conclude, we can say that life insurance is a precious asset.