Let us take a look at what part of the balance sheet life insurance falls under and whether it is an asset or not.
The very short answer is that while term life insurance is not typically considered an asset but the cash value of the life insurance that is permanent may very well be.
What is an Asset?
Very simply put, an asset is something that is considered to be a resource and in which you invest with the hope of making a return on the investment that you made. Most people do have one form of asset or another and in most cases, these assets are tangible assets.
This can include things like a home or other items that may be considered valuable, financial assets (this includes retirement and savings accounts). In most cases, such assets fall under insurance policies. It can even be a retirement life insurance plan. The idea is that you hope to gain value from these assets after some time has gone by.
The thing that we want to know is whether or not a life insurance policy is an asset. Well, the answer depends on some key factors. If it is simply a policy in which your dependents are protected in the event that you pass away, it will not be considered to be an asset.
However, life insurance of the whole life insurance policy variety and also another type of life insurance that does have a cash value component in them are considered to be assets. This is especially applicable for some legal proceedings such as divorce.
While insurance that has a cash value is technically considered to be an asset, it would not be wise for just about anyone to invest in it without doing proper research on the matter and seeing if they are a good fit or not. The best way to look at this is to think of the policy as a financial tool whose job it is to complement the other investments that you may have.
Is Life Term Insurance Considered An Asset?
An insurance policy that is of the term life type normally lasts for a period of time that has been predetermined. It is usually between 10 to 30 years. This type of life insurance, the term life insurance type, is not considered to be an asset.
The main point of having an asset is to get some return on the investment in the future. With this type of life insurance policy, you in fact hope that the policy does not pay out as that would mean that you have expired prematurely.
The idea behind this type of insurance is that in the case that the absolute worst-case scenario happens, your loved ones are protected financially.
However, if you are to get old or ill enough and you succeed in selling the policy for a profit, then the earnings on those will be considered to be a financial asset.
If the sum total of your assets is $11.58 million or even more, the proceeds from the insurance will be considered as an asset to your beneficiary and thus can be included when you calculate the estate or inheritance tax. What we are trying to get at is that term life insurance is not an asset when you are alive and you own the policy.
Because most assets take about a few decades to fully appreciate in value, you should buy this type of policy as being complementary to your other assets.
If unfortunately, you pass away before the investments you have made have matured, the death benefit of the policy will in most cases be much greater than what your assets are worth. It will provide support to any dependents that you may have.
Is Whole Life Insurance Considered To Be An Asset?
Whole life insurance on the other hand and other types of life insurance that have a cash value are considered to be assets. This especially holds true in some particular legal settings such as in a divorce.
When you do get this type of policy, a part of the premiums that you pay will go into a savings component which is tax-deferred. This is known as the cash value of the policy. The exact amount that goes into the savings component depends on the individual policy that you have chosen.
Due to the fact that the cash value of the policy grows as time goes on and because it behaves similar to an investment, this value will be included in the value of your overall estate. Make sure that you are fully aware of this and do proper research on the matter as it is very important in the case your assets are subjected to an estate tax.
Is it a good investment?
Although the cash value part of the whole life insurance may technically qualify it to be an asset, it will most likely not be a good investment option for most people.
These types of insurance policies usually come with very limited options for investing and they also have typically low rates of return. Dedicated investment vehicles (this includes things like mutual funds, 401(k) or IRA) will in all probability provide much better ROI over the long run.
It is also worth noting that these types of policies are much more expensive than their alternatives, in fact, it is about 5 to 15 times more expensive.
In almost all cases, investors will be better off with a term life insurance policy. This will enable them to receive the maximum benefits that a life insurance policy may provide.
