Believe it or not, you may be holding onto a financial asset you didn’t realize you had: your life insurance policy. When most people think of their financial assets they likely think of their stocks, bonds, mutual funds, and ETFs — resources that hold economic value with the potential to generate cash flow for its owner. They may also consider their physical assets: real estate, art collection, cars, etc. But have you considered that your life insurance may be one of your largest and most valuable assets? A life insurance policy is most often perceived as a safety net for your loved ones, but it holds hidden dimensions that can transform it into an asset — adding a layer of financial versatility that many may not even be aware of.
Throughout this article, we’ll uncover the intricacies of life insurance as an asset. We’ll break down the key components that enable policies to accumulate cash value over time and explore the circumstances under which life insurance can be sold for its underlying value.
The Primary Function of Life Insurance
First, it’s essential to understand the primary function of a life insurance policy is to provide a financial payout to your beneficiaries if you unexpectedly pass away. There are several types of life insurance policies, but the most common are term policies and permanent policies.
- Term Life Insurance: Term policies provide life insurance coverage for a set period of time. If the insured passes during the set term, the policy’s beneficiaries collect the death benefit. If the insured does not pass within the set term, the coverage ends unless the policyowner decides to extend their policy (which typically comes with an increased premium).
- Permanent Life Insurance: Permanent policies — such as universal or whole life — provide life insurance coverage for the insured’s entire life, ensuring a death benefit payout as long as there are no outstanding debts against the policy. Permanent policies have a cash value account and can accumulate savings over time. The cash is invested and grows over time.
Life Insurance as a Financial Asset
While life insurance can provide much-needed peace of mind and financial coverage for loved ones, its function may change over time depending on the policyowner’s needs. Later in life, policyowners may find themselves strapped for cash or needing a windfall to pay for an unexpected financial responsibility. During those times, it’s important to reshape the traditional view of life insurance: it’s more than just a safety net; life insurance can be considered an asset in its own right. There are a few ways life insurance can produce a return for the policyowner while the insured is still alive:
- You can access the cash value of your life insurance policy. Permanent policies, like whole life and universal life, typically include a cash value account that accumulates cash over time. A permanent life insurance policyowner can tap into their cash value account and borrow or withdraw funds for personal use.
- You can sell your life insurance policy for cash to a third party. Qualified life insurance policies may be eligible to be sold to a third-party buyer (typically a licensed life settlement provider) for a cash payout.
Not only should life insurance policies be considered a safeguard, but they can also be growth engines in times of need, offering accessible liquidity for unexpected circumstances.
Is Permanent Life Insurance an Asset?
A permanent life insurance policy is generally considered an asset. Much like other forms of life insurance, permanent life insurance policies like whole or universal life provide a safety net for loved ones through a guaranteed death benefit. However, this type of policy also includes a cash value component, accruing cash over time based on your premium payments and the investment returns it earns.
This dual-purpose type of policy not only secures your loved ones’ well-being in the event of your death, but it also grows a cash reserve that can be used during your lifetime. Policyowners can access cash within their permanent policy by:
- Borrowing. Taking a loan from your permanent life insurance policy allows you to access funds you’ve already paid into the policy without changing the death benefit amount. As long as you pay back your loan before you pass, your beneficiaries will receive the full death benefit amount.
- Withdrawing. You can withdraw funds from your cash savings account. Withdrawing cash from your life insurance policy can decrease the death benefit your beneficiaries receive. Check with your insurance carrier to see if there are any withdrawal fees you may incur before withdrawing cash from your policy.
- Surrendering. Policies that have cash value also have cash surrender value. If you’re no longer interested in life insurance coverage, you could explore the cash surrender value of your policy. Before you do, you may want to see if your policy qualifies to be sold in a life settlement as they provide, on average, four times the cash surrender value.
- Selling. Based on a 1911 U.S. Supreme Court ruling in Grigsby v. Russell, life insurance is considered personal property that can be sold like any other asset. Permanent life insurance policyowners can sell their life insurance policy for cash to a third-party buyer. When the policy is sold, the policyowner receives a one-time cash payment after they transfer ownership to the buyer, who is henceforth responsible for the policy’s premium payments. Upon the insured’s death, the new policyowner receives the death benefit.
Is Term Life Insurance an Asset?
Determining whether your term life insurance policy is an asset can be tricky. As a rule of thumb, term policies are not inherently considered assets because they do not have a cash value component in the traditional sense. You cannot borrow or withdraw cash from a term life insurance policy because it’s not structured to accumulate cash over time like a permanent life insurance policy. A term policy offers very straightforward coverage: your beneficiaries receive a death benefit if you pass away within the set period of the policy.
However, in a life settlement transaction, qualified term policies can be sold for cash and generate income for the policyowner. A term life insurance policy that qualifies to be sold in a life settlement can be considered an asset because of the cash payout it generates for the policyowner. If you’re curious to find out whether your term life insurance policy qualifies for a life settlement, contact the experts at Coventry Direct for a complimentary policy valuation.
What Is A Liquid Asset? Is Life Insurance Considered Liquid?
The term “liquid asset” refers to an asset that can be easily converted into cash without causing significant fluctuations in its market value. In essence, it’s something you can turn into cash at a (metaphorical) moment’s notice.
Oftentimes, people think of the following as liquid assets:
- Money in your checking or savings account
- Stocks
- Bonds
- Mutual Funds
- Money Market Accounts
Life insurance — particularly permanent policies due to their cash savings component — can provide policyowners liquidity. Not only do policyowners have the option to borrow, withdraw, or surrender their policy for cash, they can sell their qualified life insurance policy for a cash payout from a life settlement provider. Your life insurance isn’t just a locked-up asset; it should be seen as a source of readily available funds.
Tips To Maximize Your Assets With a Life Settlement
One of the most lucrative ways to maximize your life insurance policy as an asset is to sell it to a third-party buyer. This option works well for policyowners who no longer want or need their policy and want to offload premium payments to another party.
If you’re ready to turn your life insurance policy into a financial asset through a life settlement, there are a few key tips to keep in mind:
- Get a policy appraisal. Start by finding out how much your policy may be worth in a life settlement. You can reach out to the experts at Coventry Direct to understand whether your policy qualifies for a life settlement and how much it could be worth in a sale.
- Work with a licensed life settlement provider. Since a life settlement is a legal transfer of policy ownership to another party, you want a third-party buyer who is legitimate, trustworthy, and experienced.
- Understand the life settlement process. Selling your policy to another entity takes tenacity — and a lot of paperwork. It’s essential to understand the process of a life settlement so you aren’t caught off-guard by the approvals required to transfer ownership of your policy to a licensed life settlement provider. If you have any questions about the life settlement process, reach out to the experts at Coventry Direct. With decades of experience in this space, we can provide answers to all of your life settlement questions.
- Be responsive. Going through a life settlement requires you to share your health and life insurance policy information with the life settlement provider, which requires approval processes and paperwork. Being available to sign documents and provide approvals can help speed up the process, which can help you receive your proceeds faster.
- Work with your financial advisor. One of the most important things you can do before entering a life settlement is get advice from your financial advisor. They can help you understand any tax implications of selling your policy.
For more tips on selling your life insurance policy, reach out to our team of experts at Coventry. We’re here to help you understand the life settlement process and get started!
Frequently Asked Questions
Navigating life insurance as an asset can spark many questions. Here, we address some of the most frequently asked questions about life insurance as an asset.
Q: When is life insurance an asset worth owning?
A: Life insurance is worth owning as an asset when you have a clear understanding of your life insurance and financial goals, and how a policy aligns with them. If you seek both financial protection for your beneficiaries and the potential to accumulate cash value over time, a permanent life insurance policy might be a fitting choice. Assess factors such as your age, financial stability, and long-term objectives to determine if owning life insurance as an asset is appropriate for your situation.
Q: Is life insurance considered an asset in divorce?
Yes, typically, a permanent life insurance policy is considered an asset in a divorce. A term policy is not considered an asset in a divorce since it does not have any cash value attached to it.
Q: Is life insurance an asset after death?
Yes, life insurance can be considered an asset to the beneficiaries after the policyholder’s death. Upon the policyholder’s passing, the beneficiaries receive the death benefit payout. This death benefit can provide substantial financial support, making it an asset to the beneficiaries who receive the payout.
Q: Is life insurance subject to estate tax?
Life insurance death benefits are generally tax-free to the beneficiary, however, there are certain exceptions. If the life insurance proceeds are included in the deceased estate and the estate exceeds the federal estate tax threshold, estate taxes may be due on the amount that’s over the limit.
Q: What kind of policies can be sold in a life settlement?
Most types of life insurance may be sold in a life settlement, including whole life, universal life, term, variable life, survivorship, and group life. Get more answers to your questions about life settlements by visiting our Life Settlements FAQs.
When it comes to your personal finances, life insurance should be considered a multi-dimensional tool that goes beyond its conventional role. Understanding that it can be used as an asset can transform how you manage your financial resources. Whether you’re strengthening your liquidity strategy or adjusting your retirement goals, recognizing the potential of your life insurance policy can unlock doors you may not have realized were even there. As you explore the potential to sell your life insurance for cash, look to Coventry Direct for any questions you may have. Our team stands ready to answer your questions and help you discover your policy as a financial asset.
