How to turn Life Insurance into a Financial Asset?
As of 2024, about half of Americans had life insurance coverage. While life insurance is often thought of as a way to support loved ones after death, certain policies can serve as a financial asset you can use during your lifetime, much like an IRA or 0mutual fund. These policies allow you to build cash value over time and access it when needed. In some cases, you can withdraw; in others, you can borrow against the policy. When done correctly, you can even avoid tax liabilities.
Not all life insurance policies are the same. If you’re looking for a policy that can act as a financial asset, focus on those with a cash value component. Generally, only permanent insurance policies offer this feature, as term insurance, which is usually more affordable and only valid for a specific period, doesn’t allow you to build money in an account you can access.
Here’s a look at some policies that can act as financial assets, how to access their benefits, and key things to be aware of.
Life Insurance policies that can function as Financial Assets
Permanent life insurance policies let you invest in conservative options like mutual funds or exchange-traded funds (ETFs). You have the flexibility to diversify your investments based on your risk tolerance and financial goals. This makes permanent life insurance a useful tool for hedging against market risk.
The two primary types of permanent life insurance that can function as financial assets are whole life insurance and universal life insurance.
Whole Life Insurance
Whole life insurance is the most common form of permanent life insurance. Along with a death benefit, it lets you build cash value. A portion of your monthly premium goes into a cash value account, making it similar to having an insurance policy with a savings component. Your cash value grows over time at a minimum guaranteed rate specified in your policy, so it’s important to read the fine print. Additionally, the premiums for these policies usually remain fixed for the life of the policy.
Universal life Insurance
Universal life policies work similarly to whole life, allowing you to build an asset by earning interest over time, which you can borrow against. However, unlike whole life, the premiums for universal life aren’t fixed, so they can change, and there’s no guaranteed rate of return on your money. Under the universal life umbrella, you’ll find "variable universal life insurance," which lets you invest your earnings in accounts like mutual funds, offering the potential to grow your money even more over time.
How to use your Life Insurance as an asset?
You can use your life insurance as an asset in several ways. Over time, as you contribute to your policy, you gain the option to borrow against your accumulated savings. Plus, your earnings grow tax-deferred. Here’s how you can make the most of your life insurance as a financial asset.
Take a Loan from your Policy
You can borrow against the cash value of your permanent life insurance policy, but be sure to check the fine print. The insurer sets the interest rate, which can be fixed or variable. If you take out a loan and don’t repay it before you pass away, the outstanding balance will be deducted from what your beneficiaries receive.
Use your Policy as Collateral for a Loan
You can use your life insurance policy as collateral for a loan in certain situations, which can help you get approved more easily or secure a better rate. By using your policy as an asset, you demonstrate your reliability as a borrower. However, if you pass away before repaying the loan, any remaining balance will be deducted from your beneficiaries' payout.
Withdraw Funds
Instead of taking a loan that requires repayment, you can simply withdraw funds from your policy, which you can keep. However, if your withdrawal reaches your investment gains, you’ll be required to pay taxes. Additionally, like a loan, the amount you withdraw reduces the policy's value, meaning your beneficiaries will receive less later.
Option for “Accelerated” Benefits
Certain policies allow you to access your benefits during your lifetime in case of a serious medical emergency, like cancer, a heart attack, or kidney failure. With this option, most policies let you withdraw between 25% to 100% of your policy's value.
Surrender the policy (cash out)
“Surrendering” a policy is simply another way of saying you’re canceling your coverage. When you do this, you receive the cash value you’ve accumulated, minus any fees charged by the insurance company. Be sure to read the fine print carefully, as those fees can sometimes be quite high. It’s similar to an early withdrawal from a retirement account, where penalties are expected. However, if you no longer wish to keep your policy and need the funds for more urgent matters, surrendering can be a practical option.
Always consult your J.P. Morgan advisor or a tax professional if you have any questions.