Yes, life insurance is an asset. However, it is important that we first define what an asset is and then see how life insurance fits into the category of an asset.
Assets vs. Liabilities
Robert Kiyosaki, author of Rich Dad, Poor Dad, has a simple way of defining assets and liabilities. An asset is something that puts money into your pocket and a liability is something that takes money out of your pocket.
An example he offers is your primary residence. Unlike investment property that typically provides cash flow income (i.e. cash in your pocket) to you in the form of rent, depreciation, amortization, and equity growth, your primary residence takes cash out of your pocket in the form of your mortgage payments.
What is considered an Asset?
An asset adds value to a person or business (puts money into your pocket). There are two main types of assets, tangible and intangible. Tangible assets are those that can be touched. Intangible assets are those that cannot be touched.
Some examples of tangible assets:
- Real estate (such as buildings and land)
- Precious metals (such as gold, silver, copper and platinum)
- Cash value life insurance
- Mutual Funds
- Money Market Accounts
- Certificates of Deposit or CDs
Some examples of intangible assets:
- Use rights – land, air, water
- Buy-Sell Agreements
- Domain Names
Some examples of liabilities (i.e. things that take money out of your pocket)
These liabilities tend to decrease in value over time and detract from a wealth building plan.
- Recreational Vehicles
Is Insurance an Asset?
Typically when we think of insurance we think of expenses. Insurance coverage such as home, auto, health or liability take money out of our pocket. However, what if there was an insurance product that put money into your pocket? That would fit Kiyosaki’s definition of an asset above. Before we talk about this type of insurance we need to differentiate between the different types of life insurance.
Different Types of Life Insurance
There are two primary types of life insurance: Term Life and Permanent Life
Term Life: Term life is a contract between the insured and insurer for a specified period of time, i.e. the “term” of the policy. Term lengths can be as short as one year up to a maximum of 30 years (there was even a 35 year term life ROP product but a quick Google search shows that it might no longer be available). When the term of the policy ends, the policy can still be renewed to a specific age, typically age 90 or 95. However, the premiums will increase when the term expires. And the older you are the more expensive the policy becomes.
Permanent Life: Permanent life insurance includes ordinary life, also called whole life insurance, and universal life insurance. Each type of permanent coverage has its benefits and unique features. We at insuranceandestates.com are advocates of the infinite banking concept and we tend to lean towards dividend paying whole life insurance as the primary vehicle for a banking policy.
Life Insurance is an Asset
Whether or not life insurance is an asset will depend on what type of policy we are referring to. Term life is not an asset. However, permanent life insurance typically will be an asset. What is the differentiating factor between the two? Cash value.
Permanent life insurance typically builds cash value. Some Guaranteed Universal Life policies are designed to maximize the death benefit and minimize cash value. Therefore, there may be little cash value in the policy. However, many permanent policies have a sizeable amount of cash value available, especially policies that employ a paid up additions rider.
Life Insurance as an Asset Class
We need to only look to banks and corporations to determine if life insurance is considered an asset class. Banks and Corporations use life insurance as an asset because it is one of the most tax-advantaged vehicles available. Some advantages are:
- Tax Free Death Benefit
- Tax Free Policy Loans
- Tax Deferred Cash Value Growth
Structuring life insurance in an executive bonus plan is a great way banks and companies benefit life insurance. Key man insurance and buy-sell agreements are two other common uses of life insurance as an asset class.
BOLI-Bank Owned Life Insurance
Bank owned life insurance is a policy where the bank is the owner and often the beneficiary and the employee is the insured. Most bank owned policies are insured by mutual companies, some of the most solid financial companies in the world. Although there are restrictions on how much life insurance a bank can own, bank’s balance sheets will often have more life insurance assets than real estate assets. Two top banks have life insurance assets of ninteen and seventeen billion respectively.
COLI-Company Owned Life Insurance
Company owned or corporate owned life insurance is coverage that is owned by the company on the life of an employee. Often the employer is the beneficiary of the policy and the policy typically is referred to as key person insurance. COLI can also be owned by business owners as part of a buy-sell agreement.
Exception: Qualifying for Financial Aid as a Student
Cash value life insurance not considered an asset when you are applying for federal student aid. This is a huge advantage and why life insurance for children may be a superior choice to a 529 College Savings Plan.
Implications of Having Life Insurance as an Asset
One negative aspect of having life insurance assets or any assets for that matter is how these assets affect Medicaid eligibility. That is why proper retirement planning is so vital to your overall wealth building strategy. With the proper plan in place, things such as Medicaid eligibility won’t matter. You will be on a different level than those who need to concern themselves with such things.
A cash value life insurance policy is a valuable asset and should be part of anyone’s holistic financial plan. When combined with the concepts taught through infinite banking, life insurance may be the best investment you ever make.