Life Insurance

Life Insurance as an Asset

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Is life insurance considered an asset? Most forms of life insurance aren't considered assets, but there's a subset that can serve as a liquid asset. Some forms of permanent life insurance include a cash value component, which shifts them into the liquid asset category.

To determine what is considered a liquid asset, follow a simple set of rules:

Liquid assets can be exchanged for cash with relative ease and speed, without depreciation. While term life insurance policies don't fit this criterion for the policyholder, permanent policies with cash value do. However, the payout on a life insurance policy is an asset for beneficiaries once it's received.

What are liquid assets?

Liquid asset examples include stocks, some life insurance policies, cash, and bonds. The key is that a liquid asset must be exchanged for its value in money quickly and easily. For that reason, cash is the most liquid asset. 

Most life insurance doesn't fit this definition because the policy payout isn't claimable at any time. On the other hand, cash value policies include a feature that the policyholder can liquidate at any time. There are multiple options for doing so, depending on the policy and insurer.

Is life insurance an asset?

Term life insurance isn't an asset, but permanent life insurance plans include cash value. These policy types include universal life, whole life, and variable life. The cash value component allows for usage and flexibility of the policy that isn't possible with other types of life insurance. 

Whole life policies from Ethos are available to people ages 66-85, so they don't have as much time to accrue interest as other permanent policies purchased earlier in life. But for many young people, a term policy makes more economical sense.When you're considering a new policy, the Ethos coverage calculator can help you determine how much life insurance you need.

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5 ways to use a cash value life insurance policy

Note: This information refers to features of some permanent whole life policies, and not necessarily those offered by Ethos. 

  • Borrow against the policy

You can effectively borrow money from yourself by taking a loan against the policy. It's common for insurers to offer better rates on these loans than you usually find with banks. Leaving the debt unpaid can result in an equivalent reduction from the policy payout. 

  • Prepay premiums

Premiums can be paid out of the cash value portion of your policy. It's often possible to set this as a recurring payment system or to prepay a significant amount at once. Doing this can help keep your policy active without requiring out-of-pocket money. 

  • Increase coverage 

Folding your policy's cash value into the payout is an option with many insurers. This way, whatever cash value you've accumulated will be added to the payout your beneficiaries receive. Otherwise, the cash value doesn't go to beneficiaries. Instead, the insurer claims any remaining cash value if the policyholder passes away before it's used. 

  • Withdraw cash value

You can withdraw cash value directly from some policies, giving you immediate access to spending cash. However, doing this can negatively impact your payout size and result in higher premiums. Choosing this usage requires careful planning if you don't want your rates or coverage size to change.

  • Surrender the policy for cash value

It's possible to surrender your policy to the insurer for a cash payout. Doing so will cancel your policy, but you'll receive the accrued cash value minus fees. The cash surrender value of your life insurance asset is subject to income tax. 

How does cash value insurance work?

Permanent life policies can include cash value components. These features serve as a type of investment vehicle for the policyholder, but there are differences between policies. 

Some have fixed growth rates, while others use a more traditional investment model dependent on market performance. In the second type, your cash value isn't guaranteed to grow and may even decrease during market downturns. 

In cash value policies, a portion of your premiums is attributed to the investment feature of your policy. That means every time you pay premiums, you're adding to your plan's cash value. It's possible to intentionally overpay on premiums and accelerate the rate at which your cash value grows.

Buying cash value life insurance as an asset

Whole life insurance is one of the three main types of liquid assets. In some states, permanent life policies can serve as life insurance asset protection because those state laws protect these plans from creditors. 

In states where this applies, that means that creditors cannot claim the cash value of a policy to settle your debt. Before purchasing life insurance as asset protection, check the laws of your state to see if your policy is protected. Still, many use online life insurance policies to help balance debt. However, there are many other ways to pay off debt for those with different plans for their policy.

Ethos offers whole life policies for individuals between the ages of 66 and 85, independent of medical history. While medical exams aren't required for these policies, some health questions are. 

Still, applicants within the specified age range are guaranteed acceptance, independent of health issues. Check your price today.

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