Can Insurance Be Considered an Asset?

May 24, 2023

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Insurance has been around for longer than you might expect. Its origins date back to ancient Babylon, wherein the first “insurance policy” was written. In the mid-1600s, investors would be secured by sailors and traders to spread around the risk of a cargo ship being lost at sea.

Modern insurance isn’t new, it’s just evolved from how it used to be. The stability of the insurance industry is remarkable; as long as people have possessions, insurance will continue to be a thing. Most people have insurance, whether that’s for their vehicle, their home or rental apartment, or even their life. People rarely look deeper into what insurance is and how it works.

Insurance protects your finances and financial health. Assets can help improve your financial health. So, the question is, is insurance technically an asset?

Yes and no. Let’s get into it.

The definition of insurance

How is insurance defined? Insurance is, in layman’s terms, a contract, which is represented by a policy. This policy details that the policyholder would receive reimbursement (or “financial protection”) if a loss occurs. The reimbursement would be paid out by the insurer, or insurance company.

Every insurance company charges a fee for their insurance policies called premiums. Those premiums are taken together and consequently pooled into a larger sum of money, using money from hundreds, thousands, or even millions of policyholders. That pool of money is used to make payouts if a loss should occur, and also helps to make policies more affordable.

Depending on the scale of the potential loss, insurance can be more or less expensive. Insurance can insure endless different kinds of losses, whether that’s losses due to a liability claim alleging third-party injury, physical losses from a residential fire, or a stolen vehicle.

There are numerous different types of insurance policies. For brevity’s sake, we’ll focus on personal lines insurance. The most common types are life, homeowners, auto, and health.

What are the main components of insurance?

In order to understand insurance, policyholders need to understand its main components. Those are, as follows, premiums, deductibles, and policy limits.

Let’s go over these briefly: a premium is the price of your insurance, which is generally expressed as a monthly expense. It can also be paid semi-annually or annually, depending on the policyholder’s choice. The actual premium amount can vary immensely, depending on a lot of things like the asset being insured, the risk presented, and the amount of coverage purchased.

A deductible is the policyholder’s percentage of risk. They’ll pay out a set amount, usually expressed in a straight dollar amount or a percentage, in the event of an insured loss before the insurer pays the remaining amount.

Finally, policy limits are the total amount a policy will pay out for an insured loss over the course of a single policy term. For a home insurance policy, an insured might have a $1 million policy limit for their personal liability coverage. No matter how many claims they make during their 12-month policy term, their policy will pay out a maximum of $1 million. If losses exceed that amount, then the remaining costs would have to come out-of-pocket.

What is considered an asset?

An asset is essentially something that you control and has a kind of value you are able to access. An example of an asset might be real estate, a car, or money in a bank account. These are able to provide you with income, or they help fund your goals. Assets can store value, so they can be sold for money later if you need it in an emergency. Assets like real estate may also rise in value or produce income (especially if you rent real estate) which may improve your net worth.

Insurance insures assets. But is it itself an asset?

Most insurance policies, like home insurance and auto insurance, don’t exactly fall under the definition of an asset. They’re a means to protecting your assets, and your financial health, but they don’t help pay your expenses (unless a loss occurs) and they don’t have a value you can access.

Well – except for some forms of life insurance. Here’s why that is.

Is life insurance an asset?

Life insurance can adhere to the definition of “asset.” Think about it: life insurance may provide a death benefit once the insured person dies, which families and loved ones may then use to reduce their risk of financial hardship. Term life insurance policies don’t have an accessible cash value during the duration of the person’s life and once the term is up, they’re done. There’s no build-up of funds over the term and the policy only pays out if the insured dies during the policy term.

Policies that have cash value may be considered an asset. With term life policies vs permanent life policies, term life policies don’t have a cash value and end after the term has finished. Permanent life insurance policies accumulate cash value if you pay into the policy (vias premiums) at an amount which exceeds the actual premium cost. That excess will then contribute to your cash value, which can be used later.

Technically term life policies do have their own value, since they do provide life insurance protection, but they don’t have an accessible value that is accessible and therefore aren’t assets.

There are a few types of policies that can be considered assets and build cash value. Those are:

  • Whole life policies, which offer guaranteed cash values and death benefits at issue. They are predictable and do not change with time.
  • Variable life, which can be difficult to value as you can choose to invest securities with cash value in these – but those securities/investments can fluctuate over time.
  • Universal life, which offers flexible premiums, and accumulates a cash value based on how much interest your insurer credits to your policy.

One of the great benefits of life insurance cash value is that there are several tax advantages which can be useful throughout the course of your life. The value that accumulates is tax deferred, so you can withdraw at any point in your life without creating a “tax liability.”

Life insurance as an asset can come into play during a divorce, bankruptcy, collateral for a loan, can assist in estate planning, and can even be sold. Terminally ill individuals can sell policies for a “viatical” settlement, which is when the company receives your death benefit upon your passing and you can use your policy funds while you are still alive. Of course, in this situation, heirs and beneficiaries could suffer.

Some key takeaways: yes, permanent life insurance can function as an asset (but term life insurance can also provide valuable benefits and is more ideal for some individuals based on their situation.) Depending on what your life goals are, some other investments may serve you better, but it varies! Everyone’s situation, financial health, and beneficiaries’ needs are different. Choosing the right investment for you and your family may be best done with the assistance of a broker.