Spoiler alert: Yes, cash value life insurance is an asset. In fact, life insurance can be an uncorrelated asset, particularly participating whole life insurance, providing a fantastic hedge against market risk.
However, before we get too far ahead of ourselves, 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.
According to Kiyosaki, an asset is something that puts money into your pocket and a liability is something that takes money out of your pocket.
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 real estate 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.
Therefore, your home is not an asset.
What counts as 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.
Another way to look at assets are by separating them into financial assets (e.g., cash, bonds, stocks) and real assets (e.g., real estate, commodities, collectibles).
Another characteristic of an asset is liquidity. Assets can be liquid or illiquid.
For example, publicly traded stock is liquid, whereas private equity in a business is illiquid.
Additionally, some assets are appreciating and others are depreciating.
For example, real estate typically appreciates, but in an economic downturn it may depreciate.
Your car is an asset, but unless it is a classic, its value depreciates over time.
So, let’s take a look at some assets.
For our purposes here we will separate assets into tangible and intangible assets.
Some examples of tangible assets:
- Real estate (such as buildings and land)
- Precious metals (such as gold, silver, copper and platinum)
- Commodities (e.g. electricity, oil and natural gas)
- Mutual Funds
- Money Market Accounts
- Certificates of Deposit or CDs
- Cash value life insurance
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)
- Loans (Mortgage, Auto, Student)
- Credit Cards
- Recreational Vehicles
These liabilities tend to decrease in value over time and detract from a wealth building plan.
In the above list, a mortgage loan on an investment property would not be a liability but a mortgage on your home would.
The main difference is one produces cash flow while the other takes cash out of your pocket.
Cash Flow Asset
Most people look to net worth to determine wealth. However, it is cash flow and liquidity that is a true measure of wealth.
Without cash flow and liquidity, your money is not accessible and is most likely not being maximized.
We would propose that cash flow and liquidity is the true measure of an assets value.
So, the questions then becomes,
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.
Therefore, under our definition above, these types of insurance would be a liability.
However, what if there was an insurance product that put money into your pocket? That would fit Kiyosaki’s definition of an asset.
Now before we talk about this type of insurance that fits the definition of an asset 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 vs Permanent Life
Term Life Insurance:
Term life is a contract between the insured and insurer for a specified period of time, i.e. the “term” of the policy.
Term insurance lengths can be as short as one year up to a maximum of 30 years.
When the term of the policy ends, the policy can still be renewed to a specific age, typically age 90 or 95.
However, the term insurance premiums will increase when the policy’s term expires. And the older you are the more expensive the term insurance becomes.
Renting vs Owning
Term life is similar to renting an apartment or home. You pay rent in exchange for the right to live in the home.
However, you don’t get your rent back when you are done renting. And you landlord will eventually raise your rent.
Term life insurance does not build cash value and is therefore not an asset.
You should be aware of another option besides annual renewable term, which is convertible term life insurance.
If your term policy allows you to convert you can choose to option your rider and convert all or a portion of your death benefit to permanent life insurance.
And if you have to choose a term life policy, then make sure it has a conversion option included.
Permanent Life Insurance:
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.
You can choose whole life, universal life, indexed universal life and variable universal life. Each type of permanent coverage has its benefits and unique position as an asset.
Determining the best life insurance policy for you comes down to your personal goals and objectives.
Life Insurance is an Asset
Whether or not we define life insurance as an asset will depend on what type of policy we are referring to.
Term life is not an asset. Term life insurance would be defined as a “pure” insurance policy that pays out a death benefit, but has no cash value accumulation, so it is not an asset, but the policy can be converted to an asset for your beneficiary when you die, via the death benefit.
Contrast term life with permanent life insurance.
Since permanent coverage builds cash value, cash value life insurance is an asset that can be designed to increase in value, (both your cash value and death benefit), over time.
This means that…
- Whole Life Insurance is an asset,
- Universal Life Insurance is an asset,
- Indexed Universal Life insurance is an asset, and
- Variable Life insurance is an asset.
So, the question then presents itself,
what is the differentiating factor between term life and permanent life insurance that would make one an asset and the other not?
Permanent life insurance builds cash value.
Now, some Guaranteed Universal Life insurance policies are designed to maximize the death benefit and minimize cash value.
Therefore, there may be little cash value in the policy and we would be hard pressed to call GUL an asset.
However, many permanent policies have a sizeable amount of cash value accumulation, particularly policies that employ the use of a paid up additions rider for reinvesting life insurance policy dividends.
These high cash value life insurance policies are an asset and can be used as tools for acquiring even more assets, through strategic private banking, where you focus on the velocity of money.
Asset based long term care insurance.
There is also a product called asset based long term care insurance.
Why is it called “asset based?”
It is called asset based long term care insurance because the LTC coverage is attached to cash value life insurance.
So, with asset based long term care insurance you typically get three guaranteed benefits:
- Guaranteed death benefit protection so that your beneficiary receives a lump sum payout when you die.
- Guaranteed long term care insurance coverage that pays for costs associated with a qualifying chronic illness or cognitive disorder.
- Return of premium on all your premiums paid into the policy after a specific period of time that you can opt for if you decide you no longer want the hybrid LIFE+LTC insurance policy.
Need further evidence that life insurance is an asset? Let’s take a look at banks and corporations.
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.
In fact, there is a name for each.
Bank Owned Life Insurance, or BOLI and Corporate Owned Life Insurance, or COLI, (more on these two below).
Much the same you an individual benefits from life insurance, Banks and Corporations utilize the tax incentives of cash value life insurance, such as
- Tax Free Death Benefit
- Tax Free Policy Loans
- Tax Deferred Cash Value Growth
Let’s break down each of these benefits of life insurance below.
Tax Free Death Benefit
Life insurance is not taxable if paid directly to a beneficiary.This is important because it means your beneficiary receives the entire death benefit income tax free.
A couple exceptions would be if the death benefit causes your estate to exceed the federal estate tax exemption limit or your beneficiary is your estate and your assets are not in a living trust.
Tax Free Policy Loans
When you take out a life insurance loan, you are borrowing money from the insurance company’s general account, using your cash value as collateral.
Under the Internal Revenue Code, a policy loan is not considered income and is not subject to income tax.
Tax Deferred Cash Value Growth
Whole life insurance is an asset in which the cash value grows tax deferred.
A properly structured whole life policy offers guaranteed cash value growth and you may never be taxed on the growth of your cash value if you utilize policy loans.
Is Whole Life Insurance an Asset?
We would posit that not only is whole life insurance an asset, whole life insurance is a good investment, in much the same way that real estate is considered a good investment.
Consider, what other asset apart from whole life offers guaranteed cash value growth? As as your cash surrender value grows, so does your death benefit.
And with the ever increasing cash value growth follows an ever increasing death benefit. So, the older you get, the more death benefit you may have.
Whole life vs Term
Contrast whole life vs term life, where your term insurance expires and you are left with no life insurance precisely when you need it most, flying in the face of the buy term and invest the difference gurus.
In fact, most people 55 and older return to buy whole life or final expense insurance precisely because they still need life insurance.
Whole life vs Stocks
And contrast whole life vs stocks or other risk-based assets. With whole life, you are guaranteed a return, year in and year out.
In addition, whole life provides return of premium in the form of dividends. Although dividends are not guaranteed, the best mutual insurance companies have consistently paid dividends for over 100 years.
In contrast, stocks and other risk-based asset classes, go up and down. You have no stability and no peace of mind. So, if you had to choose a “safe-bucket” to store your wealth, which is the better asset to choose?
The answer is probably both, but so often people bypass guaranteed savings of whole life insurance and stick all their money into 401ks and mutual funds.
Additional Benefits of Permanent Insurance
Further benefits of permanent cash value life insurance include structuring life insurance in an executive bonus plan which is a great way banks and companies benefit from life insurance.
Key man insurance and buy-sell agreements are two other common uses of life insurance as an asset class.
Now let’s talk briefly about COLI and BOLI.
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.
So how much cash value life insurance do banks own? Two top banks in the U.S. have life insurance assets of nineteen and seventeen billion respectively.
COLI-Company Owned Life Insurance
Company owned or corporate owned life insurance (COLI) 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.
When considering business succession, business owners often wonder about buy sell agreement life insurance tax implications.
With the favorable tax status of life insurance, a properly designed buy sell agreement using life insurance will provide excellent tax benefits.
It should also be noted that typically life insurance is not taxable, which makes it an extremely valuable asset for any business owner.
So that brings us to the one exception when life insurance is not considered and asset…
Life Insurance as an Asset Exception: Qualifying for Financial Aid as a Student
Cash value life insurance not considered an asset when you are applying for federal student aid.
Thanks to our tax code, cash value is not a countable assets on the FAFSA application for college financial aid.
This is a huge benefit and why life insurance for children may be a superior choice to a 529 College Savings Plan.
What this means for your child is that if they are in need of student loans or other type of government aid, any cash value in his or her policy will not be taken into account when determining their eligibility for such aid.
In contrast, a 529 plan will be considered for financial aid eligibility purposes.
There are other benefits of life insurance for children beyond college savings, such as teaching them the time value of money and financial leverage.
Some other exceptions when life insurance is not considered an asset
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.
Consider a lifetime of putting money into a properly designed cash value policy.
You will not need the government to take care of you since you planned ahead and intentionally prepared for your future.
Your policy can be used as a source of income in retirement without having to pay income tax on the proceeds from your policy loan.
Cash value life insurance is an asset and should be part of anyone’s holistic financial plan.
Permanent life insurance, particularly whole life, provides a stable, non-correlated asset that can act as a “safe bucket” to store your assets until opportunity knocks.
Further, when combined with the concepts taught through infinite banking, life insurance may be the best investment you ever make.
If you have further questions please leave it in the comments below or give us a call today to see what we can do for you.