Most of the time, insurance is accounted for as an expense because it takes money out of our pockets. But, don’t you think we should value it as an investment given the fact that it comes to the rescue when we run into a financial crisis? When viewed as an asset, the quality of insurance becomes the point of focus given that it is basically a future promise to pay.
While determining whether insurance is an asset of liability, cost, and value are considered. This article is meant to give an elaborative outline of ways insurance is considered as an expense by consumers.
How is life insurance an asset?
The type of life insurance will determine if it can be classified as an asset or not. For instance, term insurance is not an asset as it only carries death benefit without any cash value. The only value that is attributed to term insurance is the death benefit that can be converted to assets when being disbursed to the beneficiaries.
On the other hand, permanent insurance has a guaranteed increase in value in the form of cash value and death benefits that is designed to increase over time. This makes permanent life insurance a huge asset. Some policies are designed to maximize the death benefit while minimizing case value. However, if left for a substantial amount of time the cash value accumulated will account for a large sum of money especially if the policies allow the application of extra riders for reinvesting the insurance dividends.
Generally, the cash value of insurance policies are assets that can be used to acquire more assets with the application of the right strategy.
Asset-based long term care insurance.
Asset-based long term care insurance occurs when LTC protection is attached to the cash value. The assurance is characterized by a guarantee of three benefits that include death benefits that are disbursed to the beneficiaries as payouts, long-term care insurance coverage that is paid in the event the policyholder has chronic illnesses, and return of premiums in the event that the policy is canceled.
Life Insurance as an Asset Class
Did you know that Banks and Corporations use life insurance as an asset because it is one of the most tax-advantaged options available? This is why we have Bank-Owned Life Insurance and BOLI and Corporate Owned Life Insurance. They make use of the tax incentives of cash value included in untaxed death benefits, untaxed policy loans, and tax-deferred cash value growth. Let me explain these three terms:
-
- Tax-Free Death Benefit
When death benefits of life insurance are directly given to the said beneficiaries, the amount is free from taxation. They receive the entire benefits as they are without any deductions in the name of income tax.
-
- Tax-Free Policy Loans
A policy loan occurs when you as the policyholder decided to borrow a certain amount of money using the available cash value. The loan is not considered as an income and there it is untaxed.
-
- Tax-Deferred Cash Value Growth
Whole life insurance has the advantage of allowing the cash value to grow. With the right financial strategy in place, the growth of your cash value is not subject to any taxation on the grounds of proper utilization of policy loans.
Should I consider whole life insurance as an asset?
Whole life insurance is an asset as well as one of the most reliable investments just like property and real estate. The insurance offers guaranteed growth of cash value and the potential of increased cash surrender value and death benefits as time goes by. This means that the longer you keep your insurance active and updated the larger the chunk of benefits.
When compared with other risk-based assets like stocks, permanent insurance is said to have two advantages over them. These are guaranteed returns and premium returns in the form of dividends. On the other hand, risk-based assets are characterized by guaranteed instability as they keep fluctuating. Now, what do you think will be the most logical way to store your wealth?
Permanent cash value life insurance also gives the freedom of structuring life insurance using an executive bonus plan. This is how many companies and banks earn from life insurance. When it comes to businesses and enterprise-class assets, the same approach is used in Keyman insurance and buy-sell agreements.
Keyman is an insurance type that is purchased by businesses as a cover from losses that may be incurred should a vital member of the company be lost. It covers recruitment and training fees among other liabilities.
Bank owned life insurance
This is a policy agreement where the bank is the owner while the insured parties are the beneficiary of the insurance policy and the employee. Most of the policies that are owned by banks are insured by mutual companies although the number of life insurance that can be owned by a bank is limited. Regardless, the banks end up having assets in the form of life insurance than real estate.
COLI-Company Owned Life Insurance
This is a type of protection cover that is owned by a company on the life of an employee. The primary beneficiary of the insurance policy is the employer and in most cases, it is referred to as key person insurance or buy-sell agreement in the event that succession is being considered. The buy-sell agreement is designed to provide reliable tax benefits and the fact that it is not taxed makes it a considerable asset
When is life insurance considered to be not an asset?
Student financial aid qualification
When applying for student federal aid, cash value life insurance is not classified as an asset due to the tax codes. This means that, in the event that the student is in need of financial aid like student loan, the cash value available in the policy will not be accounted for. It will remain safe.
Net Investment Income Tax
According to NIIT, a 3.8% rate of a given net investment income of individuals, estates, and trusts that have income above the statutory threshold amounts. This is included in all the interests, dividends, annuities, royalties, and rents among other passive activities.
Social Security
When calculating income security benefits, the cash values are not considered as assets.
Medicare
Cash value as assets are also not accounted for when calculating Medicare premiums.
What are the Implications of Having Life Insurance as an Asset?
Having insurance as an asset, including life insurance, largely affects Medicaid eligibility. The qualification for free or low costs of medical care through Medicaid is determined by income and family size. This is probably one of the largest implication which can be dealt with given proper retirement planning and overall financial strategy. If you create a proper strategy, Medicaid eligibility due to insurance won’t be such a shortcoming.
Conclusion
Permanent life insurance, particularly whole life, is the perfect solution for those who need stable and reliable storage for all your wealth as you await the opportune moment to invest more. The approach can further be enhanced by including concepts like infinite banking for best investment options.
If you have further questions and clarifications, please get in touch with us using the form or give us a call today. We are always ready to provide reliable answers and perhaps help you find the ultimate financial solution.