FREQUENTLY ASKED QUESTIONS

Term life insurance is rarely considered an asset.  A financial institution would not consider a life insurance policy an asset unless it has a cash surrender value, and most term policies do not.  Term life insurance mathematically has value because it will pay out in the event of a death of the insured person.  Whether or not it is considered an asset depends upon who you speak with.

What Is An Asset? What Is An Asset Class?

Before we delve into why term life insurance policy is considered an asset or not, we should back up for a second and define what an asset – and an asset class – really is.

An asset is something you buy today and that you expect will have value in the future.  It does not necessarily need to appreciate (grow) some assets such as a car diminish in value over time.  Ideally an asset will appreciate over time.  Assets that someone would expect to appreciate would include a house or shares of a stock.  Insurance is similar to this. The cash output is contingent on something bad happening – but the payout definitely makes it an asset.

An asset class is a collection of assets that have shared characteristics. Investors have traditionally looked at asset classes as things like stocks, bonds, and real estate holdings.

Similar to any other type of asset, insurance offers the contract holder with a cash flow if a certain event occurs. With life insurance, the size and timing of the cash flow are very different from traditional assets like stocks, bonds, and real estate holdings. Insurance is especially distinct from the point-of-view of return and risk.  Distribution or risk and return is not statistically “normal” at all. In this way life insurance doesn’t conform to a traditional asset class.

The True Value Of Life Insurance As An Asset

Life insurance can be an asset, but whether or not your policy is an asset depends upon the specific circumstances.  Any permanent life insurance that has a positive cash surrender value is surely considered an asset by any financial institution.  A term policy is rarely considered an asset unless it can be sold in viatical settlement, and normally the insured person would need to have a terminal condition for it to have salable value.

For a lot of people, considering life insurance as an asset can be a hard concept for them to get their heads around. They’re familiar with other types of insurance (car, homeowners, and health), which simply reimburse the policyholder for an economic loss that the policyholder hoped would never happen – leaving him in the same place as before the loss occurred.

Life insurance is different because it compensates the policyholder’s beneficiaries for an event that is certain to occur at some point. It is not a question of if it will pay, but when (as long as the coverage is permanent). As long as the policy is kept up, the series of premium payments will eventually result in a payout.  If a term policy was purchased, every policy has a chance of paying out a death claim, even though it will not necessarily pay.  Statistically the “expected value” of a term policy can still easily be calculated by using mortality chart and death benefit, but extracting this value before a persons death is tricky.

Essentially the expected value is always less than the premium payments, otherwise a life insurance company would never sell the policy to begin with.  The only time the expected value would change is if a significant health change took place in the insured person since the policy was issued.  This would be the rare instance that someone would buy the rights to a death claim from a term life insurance policy.

Life insurance is clearly a tangible asset because it has an expected value mathematically speaking, but many people forget that it also has valuable intangible characteristics.  Namely, the intangible value comes from the peace of mind knowing that all debts can be paid off and your family can be left on easy street.  That being said, most financial institutions do not consider term life insurance to be an asset.

Cash Value Life Insurance

Some life insurance policies have more of an investment aspect to them than others. Policies that are meant to build cash value, like whole life, variable life, and universal life, let the policyholder have access to a return on their investment without needing to wait for death.  These forms of permanent life insurance can all give the owner access to cash by being surrendered, loaned against, or having cash withdrawn before the insured person passes away.  These policies can all have a positive net return while the insured person is still alive, and thereby is an asset that can pay at any time during the insured persons life.

Life Insurance Purchased Only For The Death Benefit

Life insurance policies bought just for the death benefit also have a serious economic value. For instance, a policy with a “no lapse guarantee” guarantees that the insurance company will pay out a death benefit as long as the policyholder makes all the scheduled premium payments in an expeditious manner.

Alternately, if someone has a life insurance policy they can sometimes sell the policy in what is known as a viatical settlement.  A viatical settlement happens when someone sells their policy for more than their current cash value, but less than the death benefit payout.  Investors buy groups of life insurance policies for more than their current cash value because with a large enough group of policies, they will make money from the death benefit payouts.  Even a term policy can be sold in a viatical settlement if someone has a terminal illness and the investor wants to take the risk that the person will pass before the term is over.

Let’s take a look at what some insurance agents and experts have to say on the subject:

One school of thought is that term life insurance generally isn’t considered an asset because it doesn’t have any cash value. The only case where term life insurance would result in cash would be if the policyholder passed on, and then the death benefit would go to the beneficiary tax-free.  Because term policies often expire without paying, some don’t consider it an asset.

Another insurance agent that we interviewed said that he had never seen anything official acknowledging term coverage as an asset. It is considered temporary coverage, and it doesn’t have any cash value. He also said that he had never seen it listed as an asset on any financial form that he had ever seen.  This is true, a term policy would not be listed in a mortgage application, for instance.

Another expert wrote to us that term life insurance wasn’t an asset on its own, but that it might be construed or considered as personal property. It could be convertible to a permanent cash value policy, which could then be sold to someone else as a life insurance settlement asset. If it can be sold to a third party, it can be classified as an asset.

One more agent wrote that term life insurance wouldn’t qualify as an asset, because it would only pay off in the event of a loss. An asset usually has a cash value, and can be sold at will.  There is very little market to sell a term life insurance policy.

A fifth expert said that term life insurance is actually personal property. If term life insurance has an active clause of convertibility, meaning that it can be converted to a cash value, then it could be classified as an asset.

So, to sum up, it really depends on the type of term life insurance package you have.  If the term policy is convertible, it can be considered personal property and therefore could possibly be considered an asset.  Let’s look a little more closely at that convertible term life insurance we just read about above.

Convertible Term Life Insurance

Even though it’s not as popular, there is also an investment component to term life insurance – as long as it is convertible to a permanent product.  This feature of convertibility is a rider that is often built into a term life insurance policy, but sometimes is an option that the owner pays extra for.

When you pay the yearly premium on a convertible term life insurance policy, you get a couple of things: the right to get a death benefit if the insured person dies, and chance to buy a permanent life insurance policy at good rates that are based on the good health of the insured when the term policy was taken out, regardless of any changes in health that may have occurred since that time. This could have a very significant value in terms of paying lower premiums in the event that the health of the insured declines significantly.  There is also a possibility that an insured person’s health has declined so significantly that they no longer would qualify to buy a life insurance policy.  If a term policy is convertible to permanent coverage the life insurance company must extend permanent coverage to the insured person, even if they would not issue them a new policy otherwise.

Is Life Insurance Considered An Asset Or A Liability?

Some people will tell you that life insurance is considered a liability while you’re paying your premiums.  Basically, life insurance will always be a liability to the payer while she is making payments into the policy. However, much in the way that a mortgage can be considered a liability, the owner is building equity in a cash value policy.  Ultimately unless a policy has some cash value, it can’t be considered an asset. So, if you buy a particular type of life insurance product with cash value, then it would be considered an asset. But, if it has no tangible worth or cash value, then you can’t mark it down as an asset.  That being said the point of life insurance is to offer protection, and asset or not, every policy will provide protection against death effectively.

 Conclusion

Term life insurance is considered an asset – depending on the type of riders within the life insurance you have and whom you ask. It seems that different experts have different opinions, and it can depend on the exact circumstances.  If you’re in doubt, you can always talk to your insurance agent to see the features of your policy and what sort of value it may have.  A lot of institutions would not consider term life insurance an asset when considering your personal financials the same way that they would consider a policy with a surrender-able cash value.