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Is Life Insurance an Asset? Rediscovering a Lost Tool of the Wealthy

Is life insurance an asset

Yes, life insurance is an asset. In fact, life insurance is an uncorrelated asset, particularly whole life, 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. 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
  • Cash
  • Equipment
  • Inventory
Some examples of intangible assets:
  • Patents
  • Copyrights
  • Trademarks
  • Use rights – land, air, water
  • Buy-Sell Agreements
  • Domain Names
  • Goodwill
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.

  • Automobiles
  • Jewelry
  • Recreational Vehicles
  • Boats
  • Furniture

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, 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: 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.

Another option besides annual renewable term 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.

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 or indexed universal life as the primary vehicle for a banking policy.

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.

However, permanent life insurance is an asset. A cash value life insurance policy is an asset that can be designed to increase in value, both cash value and death benefit, over time.

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?

Cash value.

Permanent life insurance typically builds cash value. 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.

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:

  1. Guaranteed death benefit protection so that your beneficiary receives a lump sum payout when you die.
  2. Guaranteed long term care insurance coverage that pays for costs associated with a qualifying chronic illness or cognitive disorder.
  3. 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 proof 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.

Some advantages of life insurance are:
  • Tax Free Death Benefit
  • Tax Free Policy Loans
  • Tax Deferred Cash Value Growth
Tax Free Death Benefit

Life insurance is not taxable if paid directly to a beneficiary. 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

Your permanent life insurance policy’s cash value grows tax deferred over time. Whole life insurance is an asset. 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 take policy loans or withdraw your cash, but do not exceed your basis in the policy.

Additional Benefits

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.

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 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 the velocity of money.

Some other exceptions
Net Investment Income Tax. The NIIT under IRC section 1411 applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts. The good news is that cash value withdrawals and loans are not subject to the 3.8% Affordable Care Act (ACA) investment tax.
Social Security. Cash value assets are not considered in calculating income taxes on Social Security benefits.
Medicare. Cash value assets are not considered in calculating Medicare premiums.

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.

Conclusion

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.

 

 

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