For high-net-worth families and individuals, life insurance can provide benefits that go beyond income replacement to support beneficiaries upon the death of the insured. As part of a comprehensive wealth management plan, life insurance can provide liquidity to cover estate taxes, equalize inheritances among beneficiaries, maximize wealth, secure a legacy, and allow beneficiaries to retain ownership of important assets, such as the family businesses or real estate.
The following looks at life insurance and how some life products can provide solutions for things such as retirement planning, funding long-term care needs, and wealth accumulation and transfer. We’ll also review the various tax advantages of life insurance and how recent changes in new tax codes could bring higher savings opportunities for permanent life insurance policyholders.
Is life insurance considered an asset?
Financial assets such as a home, investments, and retirement accounts are designed to appreciate and gain value over time. Depending on the type of life insurance policy and how it is used, permanent life insurance can be considered a financial asset because of its ability to build cash value or be converted into cash. Simply put, most permanent life insurance policies have the ability to build cash value over time. As a result, the accumulated cash value can be considered an asset when calculating one’s net worth.
The primary purpose of life insurance is to provide financial support to your loved ones upon your death. However, permanent life insurance can also offer many of the benefits similar to typical long-term investments such as IRAs and mutual funds, providing options when building a diversified wealth management portfolio. Permanent life insurance can also be an asset for hedging against market risk.
Types of asset-generating permanent life insurance
There are several types of permanent life insurance products that can provide financial security for beneficiaries as well as act as a type of savings vehicle. Here, we’ll look at the different types of asset-building life insurance products and how they work.
Whole life (WL) is a type of permanent life insurance. In addition to a death benefit, WL insurance has the potential to accumulate cash value over the lifetime of the policy by taking a portion of the premium paid and allocating it to a cash value account.
Over time, funds in the account grow tax-deferred and can be borrowed by the policy owner while he or she is still living by way of a policy loan or cash withdrawal. Because the interest, dividends, or capital gains from the cash value aren’t subject to taxes, this makes whole life insurance a popular asset-building tool. Keep in mind, however, that borrowing from the policy will also ount of the payment to beneficiaries if it is not paid back prior to the death of the policy owner, and any interest charged for the loan will also need to be paid when paying back the loan.
Similar to WL, a universal life (UL) insurance policy has the potential to build cash value by accruing interest over time that can be borrowed while the policyholder is still alive. The primary difference, however, is that a UL policy allows greater flexibility than a WL policy regarding premiums and death benefits. A variable universal life (VUL) insurance policy goes a step further in that it allows the policyholder to invest any interest earned in sub-accounts (similar to mutual funds), for even greater asset growth potential. Both UL and VUL allow any cash value accrued to grow on a tax-deferred basis.
With traditional long-term care insurance (LTCI) policies, coverage that isn’t used for care during the insured’s lifetime is ultimately lost. Hybrid life insurance products (also known as asset-based long-term care), however, provide the perfect balance of long-term care coverage if there is a need or a death benefit if the policy isn’t utilized to help pay for long-term care expenses.