Is life insurance considered an asset?

Permanent life insurance policies with cash value accounts are typically treated as assets, whereas term life insurance, which doesn't have a cash value component and only pays the policy’s face value at death, generally is not. Although permanent life insurance is not an asset for probate purposes, it can be classified as an asset in a divorce, for a mortgage, and for Medicaid purposes.

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Feb 8, 2021

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Overview

  • Permanent life insurance policies with cash value accounts are typically treated as assets.
  • Term life insurance, which doesn’t have a cash value component and only pays the policy’s face value at death, generally is not viewed as an asset.
  • Life insurance is not considered an asset of a probate estate because the death benefit proceeds go directly to the name beneficiaries and, therefore, are not part of the deceased’s assets to be distributed pursuant to a Will or probate.
  • Life insurance policies are generally classified as an asset in a divorce, but only permanent life insurance with a cash value will be subject to division.
  • Permanent life insurance policies can be an asset for a mortgage but lenders will only consider the cash value of the policy after the surrender costs have been deducted.
  • Permanent life insurance will also constitute an asset for Medicaid purposes because of the cash value component, but a term life policy will not be considered an asset.

When it comes to investments, people tend to think of traditional assets like stocks, bonds, and real estate holdings. However, certain life insurance policies can also be treated as assets.

The key to whether life insurance is an asset depends on whether the policy has a cash value component.

Permanent life insurance policies with cash value accounts are typically treated as assets, whereas term life insurance that only pays the policy’s face value at death generally are not viewed as assets.

If you are considering purchasing life insurance, you need to understand how that will affect your asset profile, particularly in relation to estate planning, divorce, house-buying, and Medicaid eligibility.

Click here to start getting life insurance quotes from Free Advice and find the right policy for you.

What are the types of life insurance?

There are two basic types of life insurance policies, term life and permanent life. There are also different types of permanent life insurance policies, namely whole life, universal life, and variable life.

All of these different types of insurance, and what makes them assets, are discussed below.

What is term life insurance?

Term life insurance lasts for a set time period. The policyholder can choose between a term ranging from 5-30 years. The life insurance expires after the term, unless the policy is renewed.

People often purchase this type of life insurance to cover a specific time period in their life, like starting a business or families with young children.

Term life insurance only provides only a death benefit. The death benefit is the face value amount of the policy that is paid to your beneficiaries, generally in a lump sum, when you pass away.

Term life insurance does not comprise a cash value account, which is like a savings account built into a life insurance policy. Term life insurance is relatively inexpensive because there’s no cash account that requires higher premiums to build up the cash value.

What is permanent life insurance?

While term life insurance is for a specified number of years, permanent life insurance lasts the policyholder’s entire life.

Permanent life insurance provides a death benefit, i.e., a payout of the policy value when the policyholder dies, but also has a cash value that can be accessed during the policyholder’s life.

The cash value component of permanent life insurance policies works like a savings or investment feature that uses a portion of the premiums to build up value. As a result, permanent life insurance premiums tend to be higher than term life policies.

One of the benefits of permanent life insurance is that the cash value accumulates on a tax-deferred basis. Policyholders also may borrow against the accumulated cash value without tax implications.

Interest will be calculated on the loan amount and any unpaid loans will diminish the death benefit and unpaid interest will be deducted from the remaining cash value.

What is the difference between whole life, universal life and variable life insurance?

Whole life, universal life and variable life insurance are all types of permanent policies, but there are some important distinctions between them.

Whole life insurance has fixed premiums over the life of the policy and a guaranteed cash value paid to beneficiaries at death. According to the Insurance Information Institute (III), whole life insurance is the most common type of permanent life insurance.

Universal life insurance allows the policyholder to change premiums and death benefits over their lifetime. Also, the cash value of a universal life insurance earns interest based on the current market or minimum interest rate, whichever is greater.

Variable life insurance is a type of permanent life insurance policy that has an investment account attached to it.

Part of your premium payments will be used to establish the value of the policy, and the rest will be invested across mutual funds, stocks or bonds that the policyholder can choose.

What are some other life insurance terminologies?

There are some other basic life insurance terminology that is important to understand when looking into different types of life insurance.

“Cash value” is the money that accumulates in a permanent life insurance policy. A portion of premium payments, typically the amount above the cost of insuring the death benefit, gets added to a cash value account that grows tax deferred. This money is accessible to the policyholder.

“Surrender value” refers to the amount the life insurance company will pay out if the policy is canceled early. The surrender value is the cash value minus any early policy termination fees and charges.

“Death benefit” or “face value” means the amount of money the company is required to pay out to named beneficiaries when the policyholder dies.

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Is insurance an asset or expense?

An expense is the cost required for something. An asset is something of value that you hope will maintain or increase in value over time. Without question, the cost of insurance is an expense, but certain policies with a cash value account may be classified as an asset.

Term life insurance is typically not considered an asset because it doesn’t have a cash value component and the death benefit pays out only after you die.

A permanent life policy with a cash value that earns interest and allows cash withdrawals while the policyholder is alive will likely be considered an asset, especially in the context of estate planning, divorce proceedings or during mortgage underwriting.

Is life insurance considered an asset in an estate?

Life insurance proceeds go directly to the name beneficiaries and, therefore, are not part of the deceased’s assets that make up the probate estate. When the policyholder dies, the death benefit does not belong to the deceased.

The death benefit, therefore, is not part of the deceased person’s estate and will not be disbursed pursuant to any Will or probate distribution. Rather, the insurance company has a legal obligation to pay the beneficiaries named in the policy.

The beneficiaries can only be designated by the policyholder and only can be changed through a “change of beneficiary” form provided by the insurance company.

Is life insurance an asset in divorce?

Each state has unique laws that govern the classification and division of property and debts in a divorce.

That said, in most divorce proceedings, both spouses will have to disclose all assets and liabilities of the marriage. Life insurance policies are generally classified as an asset in a divorce, but not one that is always subject to division.

Term life insurance only pays a death benefit without a cash value component, and so typically won’t constitute a financial asset that has to be divided between the parties. In most states, a term life insurance policy will be treated as separate property and awarded to the policyholder.

If the term life policy names the soon-to-be-ex-spouse as a beneficiary, the divorce decree should allow the policyholder to change the beneficiary.

If, however, the policyholder has been ordered to pay spousal and/or child support, the court may require that the support receiving ex-spouse be named the beneficiary to cover the policyholder’s support obligations if they die before their obligation terminates.

In common law and community property states, permanent life insurance policies that were acquired during the marriage are generally treated as marital property.

The cash value portion of the permanent life policy would be subject to equitable or equal division, depending on the divorce laws of the state.

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Is life insurance an asset for a mortgage?

Mortgage lenders will examine your assets when underwriting a mortgage as part of their due diligence in determining your creditworthiness and financial ability to afford the purchase price of a house.

Mortgage underwriters want to see assets that can be liquidated to cash. Such assets indicate the borrower’s wherewithal to satisfy the down payment and closing costs.

Permanent life insurance policies can be used as an asset for a mortgage.

However, if the policyholder intends to cancel the policy and use the cash value towards purchasing a house, then the mortgage lenders will only consider the cash value of the policy after the surrender costs have been deducted from the cash value.

The surrender cost is the fee the life insurance company charges the policyholder for canceling a permanent life insurance policy, and typically is a percentage of the cash value.

Is life insurance considered an asset for Medicaid?

In order to qualify for Medicaid benefits, eligible participants generally cannot have assets valued at $2,000 and above. Again, term life insurance will not constitute an asset for Medicaid purposes because those policies do not have a cash value component.

But whole, universal, and variable life insurance policies, which accumulate a cash value, will be considered an asset. Keep in mind that Medicaid law exempts whole life insurance policies with a face value of less than $1,500.

Getting Help

When you are shopping for life insurance, the right type of policy for you will depend on a number of variables in addition to your budget. Click here to start getting life insurance quotes from Free Advice and find the right policy for you.

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