People think of insurance as something to protect against risk: the loss of a car or a house through fire, for instance. But it can also be used as an investment. Insurance is an asset, such as stocks and bonds or private equity firms investing in companies. The difference is that with insurance, your investment only pays dividends if you make money from it.
For example, if you have life insurance, your company may pay a monthly stipend until the policyholder dies. The price of the stipend depends on how much the policyholder’s dependents are worth to them financially.
The fewer people who need to be paid out of their insurance funds to continue running their household, the higher the stipend will be. If you have property insurance, your homeowner’s association may offer discounts based on installing energy-efficient windows or adding insulation to your walls.
What is an Asset?
You buy a claim on the company or the investor’s future profits when you put money into stocks or bonds. Depending on how you hold onto those assets, you may or may not get back what you put in. Using insurance as an investment, on the other hand, allows you to reap the benefits of your investment regardless of whether the policyholder makes any money or suffers some other kind of loss. Some assets do not provide money.
Real estate and art are two examples of assets that do not produce a flow of money. Instead, the value of the assets is determined by the market, which may or may not appreciate at a rate that causes you to profit.
Insurance is an investment.
Again, it’s worth remembering that insurance is a form of investment. With most types of insurance, you collect a premium each year in exchange for a promise to pay out an amount if and when the insured event occurs, whether you’re buying a homeowners’ policy to protect your house if a fire burns it down, a car insurance policy to cover damage to your vehicle in an accident, or a life insurance policy to pay off a large death benefit if you die.
The deal you make is that the insurance company will pay out the money if the event you’re insuring against occurs. A popular form of investment is using life insurance to fund a 401(k) or another retirement account. When you buy life insurance for a spouse or child, the proceeds are placed in a pre-tax, tax-deductible retirement account.
The amount of the deduction is determined by the policy’s death benefit. It’s common for people with high incomes to max out their 401(k) contributions. Still, if you’re only collecting a low death benefit from your life insurance, you may be able to safely contribute the max amount from your regular annual income.
Is Life Insurance an Asset?
Because of this, many people worry if their life insurance coverage is an asset or a liability. After all, you may need to pay a recurring fee if a policy’s cash value increases. So, what is the value of a dollar in today’s money? You can place a portion of your permanent life insurance premiums into a tax-deferred savings account. Invested funds have the potential to rise in value. As the name implies, you can obtain this money in two ways: withdrawing it and surrendering the insurance or taking out a loan to pay back the policy’s principal.
When it comes to how your money grows, cash-value life insurance policies aren’t all the same. You can acquire cash value policies in a variety of ways, including:
Your premiums for a whole life insurance policy may not fluctuate over time. Death payments and cash value can be assured when the procedure is granted.
Flexible premiums are possible with a universal life insurance policy. However, because your account’s interest credit may fluctuate over time, estimate how much cash is worth you’ll accumulate. The performance of some universal life insurance contracts may be indexed, which means that the S&P 500 index is used as a benchmark.
When you purchase a variable life insurance policy, you have the option of investing in a variety of mutual funds. There is no guarantee that you will get your money back, as the price of the funds can rise or fall over time.
A cash value insurance policy’s interest earnings are tax-deferred, regardless of the policy type. You have a few alternatives for putting this money to good use.
With the policy’s cash value, you can afford the premiums. You don’t have to spend anything out of your wallet for them. However, this assumes that your cash value will continue to grow and earn interest.
Withdrawing cash value may also be an option.
Cash value withdrawals diminish your policy’s death benefit, which is a drawback. In other words, your beneficiaries will only receive $475,000 from$500,000 insurance if you die with a $25,000 cash value withdrawal.
As long as you pay back the loan, it does not affect the insurance’s death benefit. If you’re seeking a high-liquidity asset, borrowing from your insurance may be an attractive option. Borrowing from your insurance policy may be more convenient than selling off stocks, dipping into an IRA, or cashing out CDs.
When to Sell your Insurance Investments
The decision to sell your insurance investments is usually made after a long time. The most common reason for selling is that the policy’s death benefit is higher than the monthly premium you pay. In that case, you’ll profit if the policyholder dies, but it’s a risk if they don’t. Another reason to sell is that you want to make room in your portfolio for another investment.
If you’re in retirement, you may want to sell your insurance investments to contribute more cash to your retirement account. Similarly, you may want to sell your insurance investments if you’re planning to retire earlier than normal (in which case, your insurance company will probably cover you for a lesser amount than you’re collecting).
How much should you get from selling your insurance investments?
There’s no set rule for this. Generally, you should take out a portion of your insurance investment as soon as you sell it. You may also want to withdraw a smaller portion and reinvest the rest. If you receive a large death benefit from your life insurance, you may want to withdraw a substantial portion and put it in a savings account. This helps you avoid being tempted by the tax benefits of a large withdrawal. A 10% withdrawal rate is a common guideline.
When Is Life Insurance an Asset Worth Owning?
Financial security for yourself and your loved ones is the primary goal of life insurance. As a critical breadwinner in your household, you may not want to leave your spouse and children in a financial predicament should you have to leave the workforce. Because of this, life insurance premiums can be worth it.
To be clear, term life insurance is not a financial asset because there is no underlying value that you can tap into. You can use the cash value of a term life insurance policy for severe sickness or long-term care, but that’s different from building cash value over time. You don’t get any extra benefit from the coverage over time.
Buying permanent life insurance with a cash value could be a good investment for those who don’t mind paying higher premiums and want to fill in any holes in their estate plans.
Permanent life insurance is more expensive than term life insurance on average. As a result, you should be confident that you need or want lifetime coverage before committing to it, as the overall cost may be higher.
What about a 401(k) program?
When investing cash worth, it’s crucial to consider the time your money has to increase. Instead of letting your life insurance policy’s cash worth build up, you might be able to make more money by investing it directly in the market. You may be eligible for tax breaks if you support building wealth in a 401(k), IRA, or another tax-advantaged plan.
By looking at your financial situation, you can determine if life insurance makes sense for you and which type of policy is best for you. Talking to a financial counselor or insurance specialist can also help you determine your needed coverage.
Frequently Asked Questions
Is whole life insurance a good investment?
Life insurance policies with cash values like universal variable life insurance, unlike term life insurance, are assets in the event of a divorce or when applying for a mortgage.
You can use the cash value to describe the tax savings component of whole life insurance premiums. Depending on your policy, you may have to pay an additional fee.
You can use the policy’s cash value as an investment, which means it is part of your estate’s value. Because both the cash value and the death benefit are part of your estate’s total weight, this is especially important if your assets are subject to an estate tax.
Is whole life insurance a good investment?
The cash value of a whole life insurance policy could be an asset, but this is not a wise financial decision for most of the population.
Cash value policies have fewer investment possibilities, more costs, and worse returns. Long-term, specialized investment vehicles like mutual funds, 401(k) s, and IRAs are expected to outperform whole life insurance policies. Total life insurance is also five to 15 times more expensive than term life insurance policies of the same caliber.
Before obtaining a permanent life insurance policy, numerous tax-deferred savings accounts could be exhausted.” Find out why buying life insurance isn’t a wise financial decision—looking for a life insurance policy?
Is life insurance considered an asset in a divorce?
Because it has no cash value, you cannot divide term life insurance as a marital asset. If you have a cash value life insurance policy, such as a whole life policy, you must identify it as an asset when splitting your assets during divorce proceedings.
That includes insurance that protects you and your spouses, such as joint or survivorship policies. You can divide a joint policy in the case of a divorce. However, you must count it as an asset.
You can tell whether your life insurance is an asset simply by looking at how much money you can expect to get from it while you are still living. You can consider assumed cash value insurance policy assets if you can access them while the policyholder is alive. A qualified financial advisor can help you sort through the specifics of your situation if you’re unsure.
When life insurance is considered an asset?
Term life insurance is not an asset as long as the death benefit only pays out when you die. Permanent policies with cash values are an asset since the cash value pays interest, and you can take from it while you are still alive.
The cash value of a permanent life insurance policy can be a valuable asset.
It’s not an asset, but term insurance offers much value.
For example, you may be able to use your policy as collateral for a loan and sell it; or you may have to consider it during divorce talks if your policy is already an asset.
With permanent life insurance, you can access the cash value. However, doing so can result in tax penalties or coverage reduction.
Depending on there, other investment firms may be more effective in helping you achieve your financial objectives.
Your goal with insurance investments is to make money. That’s why you should sell your insurance investments once you’ve taken out enough from the proceeds to make a significant difference in your finances. You can reinvest the rest in new insurance investments or withdraw it from savings. Whichever you choose, keep in mind that your main goal is to make money.
Nicholas J. Banks has been an expert in the Insurance industry for over 10 years. He is well-versed in all aspects of insurance, and he has worked on Allstate Ins Group since 2006.
He attended the University of Pennsylvania with an undergraduate degree in Business Administration, followed by a Master’s degree from the University of Southern California to further his career in Insurance Management.
His experience working with many different companies has helped him develop valuable insight into how to succeed in this exciting field, which he now shares through our blog “Pro Insurance Info.”