The Value of Your Life Insurance As An Asset
Many people understandably see life insurance when the reality is they should see it as an asset. Other types of insurance, like a car, health, and homeowners insurance, all pay for losses that policy owners hope never happen while life insurance covers a loss that will happen eventually. This means the rate of return here doesn’t apply to other types of insurance.
So let’s look at life insurance, the things you can do to determine value, and how it can all help with your future financial planning.
Cash Value Life Insurance Plans
Some life insurance plans have a more obvious investment nature than others. Such policies, like whole life, build a cash value that you have access to without having to wait for the person who is insured to die. This type of policy can be listed on a balance sheet because the monetary build up and surrender charges are liquid. You can then compare it to other uses for the money used for premiums. These uses can be things like the purchases of stocks, bonds, and mutual funds.
You should know that the present value of the death benefit is overstated, however, and that causes the value of the policy to beneficiaries to be overstated.
Life Insurance Only Used For A Death Benefit
Life insurance value for policies only purchased for a death benefit is practically non-existent in comparison. They generally have a “No-Lapse Guarantee”, which means that the death benefit will be paid out as long as payments are kept up.
These policies don’t have much of a surrender value but aren’t affected by the broader market or changes in interest rates either. Here, you only need to worry about when the benefit will be paid out.
Further, life insurance payouts aren’t subject to taxes unless the policy is “transferred for value“, so the return is “after tax”. That return should be adjusted to its pre-tax equivalent before being compared to the return other investments would produce. With that in mind, know that performance compared to other investments varies depending on how long the policyholder lives and the kind of return that can be reasonably expected on other investments. In the early years of the policy, there is a distinct advantage over other investments, but that advantage dwindles until the policy’s death benefit reaches what’s called the “crossover” point. This is when the growth of other investments will likely exceed the policy’s death benefit.
Once that point is reached, the policy offers a projected rate-of-return advantage over the other investments. It also ensures against mortality risk, which is the risk that the insured may not live long enough for assets in a trust to grow to an amount the insured wants to leave to their children.
Term Life Insurance
The value of term life insurance lies in the investment component that can be taken care of as long as the policy can be converted to a permanent product. With this type of policy, when you pay the annual premium you have the right to receive that death benefit if the insured dies in the coming year. You can also purchase a permanent life insurance policy at an agreeable rate based on the insured’s good health, a rate that won’t change if his or her health declines afterward.
If you want a No Lapse Guarantee policy but don’t have the cash for the premiums, this is a good alternative. This policy’s conversion feature, the ability to purchase a permanent policy based on good health, is something that can be used in the event of a change in the insured’s health.
By knowing these basics of the value of life insurance, you can ensure that you have the right kind of policy for your financial needs, no matter what.