Many people overlook life insurance while applying for Medicaid. However, depending on the type of life insurance and the policy’s value, it may be considered an asset.
You can’t have more than $2,000 in assets to qualify for Medicaid (in most states). The most common types of life insurance policies are “term” and “whole” life insurance. Term life insurance does not qualify as an asset and will not influence Medicaid eligibility because this type of life insurance does not have an accumulated cash value. Whole life insurance, on the other hand, builds up a cash value that the owner can access, allowing it to be counted as an asset.
Is life insurance policy an asset?
Life insurance for high-net-worth families and individuals can give benefits that go beyond income replacement to support beneficiaries when the insured passes away. Life insurance can provide liquidity to meet estate taxes, equalize inheritances among heirs, maximize wealth, safeguard a legacy, and allow recipients to keep ownership of essential assets such as family businesses or real estate as part of a comprehensive wealth management plan.
The next section examines life insurance and how various life products can help with retirement planning, long-term care funding, and wealth generation and transfer. We’ll also go over the many tax benefits of life insurance and how recent changes in tax regulations may allow permanent life insurance policyholders to save more money.
Is life insurance considered an asset?
A home, investments, and retirement accounts are all supposed to appreciate and grow in value over time. Because of its ability to generate cash value or be turned into cash, permanent life insurance can be regarded a financial asset depending on the type of policy and how it is used. To put it another way, most permanent life insurance plans can accumulate monetary value over time. As a result, while determining one’s net worth, the accumulated monetary value can be regarded an asset.
The main goal of life insurance is to give financial assistance to your loved ones in the event of your death. Permanent life insurance, on the other hand, can provide many of the same benefits as traditional long-term investments like IRAs and mutual funds, giving you more options when putting together a diversified wealth management portfolio. Hedging against market risk can also be a benefit of permanent life insurance.
Types of asset-generating permanent life insurance
Permanent life insurance products come in a variety of forms that can provide financial stability for beneficiaries as well as serve as a savings vehicle. We’ll look at the many forms of asset-building life insurance policies and how they function in this article.
Whole life insurance (WL) is a sort of long-term care insurance. WL insurance, in addition to providing a death benefit, provides the potential to build cash value over the policy’s duration by assigning a portion of the premium paid to a cash value account.
Funds in the account grow tax-deferred over time and can be borrowed by the insurance owner while he or she is still alive via a policy loan or cash withdrawal while he or she is still alive. Whole life insurance is a popular asset-building strategy because the interest, dividends, and capital gains from the cash value are tax-free. Keep in mind, however, that borrowing from the policy will reduce the amount of the payment to beneficiaries if it is not paid back before the policy owner’s death, and any interest imposed on the loan must also be paid back when the loan is paid back.
A universal life (UL) insurance policy, like WL, has the ability to accumulate cash value over time, which can be borrowed while the insured is still living. The main distinction is that a UL policy offers more flexibility in terms of premiums and death payments than a WL policy. A variable universal life (VUL) insurance policy takes things a step further by allowing the policyholder to invest any interest generated in sub-accounts (much like mutual funds) for even more asset growth. Both UL and VUL allow any accumulated cash value to grow tax-deferred.
Traditional long-term care insurance (LTCI) policies allow coverage to lapse if it is not utilized for care during the insured’s lifetime. However, hybrid life insurance plans (also known as asset-based long-term care insurance) offer the ideal combination of long-term care coverage and a death benefit if the policy isn’t used to assist pay for long-term care expenses.
There’s no denying that the exorbitant costs of long-term care can wipe out retirement funds, not to mention become a financial burden on family members who must cover the price of care. A hybrid life policy and an LTCI policy can help protect wealth by providing coverage and a death payout when needed.
Considerations for using life insurance as part of a strategic wealth management plan
When you die, life insurance offers a tax-free death benefit to the people you care about. Permanent life insurance, when correctly designed and funded, can be an asset for supplementing retirement income in a tax-advantaged vehicle, giving an additional stream of income if needed.
A permanent life insurance policy’s cash value grows tax-deferred, allowing you to develop assets in a tax-efficient manner. It also allows you to take advantage of the policy’s cash value through tax-favored distributions. Simply put, it enables you to access potential financial worth through tax-advantaged loans and withdrawals. This can be a viable solution for supplementing income in retirement for individuals who have maxed out their retirement contributions beyond the limits of traditional qualified retirement plans, but a loan will reduce the value of the insurance policy by the amount of the outstanding loan, and any amount borrowed exceeding the cash value will be taxed because those funds are investment gains.
The United States government imposes an estate tax on the transfer of property upon death if the value exceeds a specific threshold. A state-level estate or inheritance tax is also imposed in many states. These taxes must be paid as quickly as possible after a person’s death. It is not always easy or practical for beneficiaries of high-net-worth persons with assets such as a business or real estate to immediately sell and convert these illiquid assets into cash. Life insurance is a valuable asset that can help offset estate taxes by providing instant liquidity.
Permanent life insurance can also help with estate equalization and distribution, which is an important part of estate planning. Life insurance can assist in determining how much heirs will get and what form the inheritance will take by distributing assets equally among heirs.
Permanent life insurance is a cost-effective approach to ensure that assets are distributed to a spouse, child, or charity. Life insurance, when combined with the protection of a will or trust, can help you leave more money to your heirs and charities. Furthermore, if you expect income and estate taxes to rise significantly in the near future, permanent life insurance will allow you to shift capital into a shelter that will safeguard your assets from increased taxation.
A family’s inheritance could be significantly reduced if the stock market performs poorly. You can better hedge against an underperforming market, stabilize wealth, and pass more assets to beneficiaries in a tax-efficient manner by directing a small percentage of your net worth or income into a life insurance policy each year. As non-life insurance assets develop and compound, the leverage provided by life insurance may be lessened over time.
The accelerated death benefit rider included in some life insurance plans allows you to receive a tax-free advance on your life insurance death benefit while you are still alive, in addition to helping fund long-term care expenditures with a hybrid life/LTCI policy. If you are terminally ill, have a life-threatening diagnosis, are permanently confined to a nursing home and are unable to perform two of the six activities of daily living, or require long-term care services for an extended period of time, you may be able to receive an advance on your life insurance policy’s death benefit, depending on the type of policy you have. Furthermore, some permanent life insurance policies have an optional LTCI rider that allows you to set away accumulating assets in the policy, thus self-insuring your long-term care needs in the future.
Preserving assets: The tax benefits of permanent life insurance
A well-designed tax planning approach should help you save money both now and in the future. Permanent life insurance can be a useful instrument for addressing specific tax-related issues.
You’ll get income from a variety of investment accounts in retirement, which are either totally or partially taxed. You can use a combination of permanent life insurance and other investment accounts to take tax-free loans from the cash value in your policy to supplement your income while maintaining assets and lowering taxes. However, when the policy owner dies, the amount of the life insurance benefit would be reduced.
You’ll also be drawing non-discretionary Social Security income and mandatory distributions from taxable retirement funds once you’ve retired. As your lower income tax brackets fill up with Social Security income, you can better minimize taxes by drawing income from the cash value in your life insurance policy, which is normally tax-free. However, when the policy owner dies, the amount of the life insurance benefit would be reduced.
If you have a significant amount of taxable income in addition to your Social Security benefits, such as interest, dividends, or other taxable income that must be declared on your tax return, you will be subject to federal income taxes on 85 percent of your benefits. In fact, the IRS considers almost all taxable income, including tax-free municipal bond interest, when calculating how much of your Social Security benefits it will deduct. The assets in your permanent life insurance policy will not increase the levy on your Social Security income.
Recent changes to IRS tax code Section 7702 and the impact on life insurance
The IRS devised Section 7702 to distinguish between life insurance policies and investment vehicles that imitate life insurance contracts. The goal of this provision is to ensure that only valid life insurance policies are eligible for tax benefits. Simply put, it determines whether or not a life insurance contract is eligible for tax benefits and how the proceeds are taxed. Whether you remove money from your policy or not, proceeds from policies that don’t match the government’s definition of a legitimate life insurance policy will be taxed as ordinary income and subject to annual taxes.
The low-interest climate in the economy has recently resulted in good modifications to Section 7702, allowing consumers to invest even more money in a permanent life insurance policy. Section 7702 allows persons who are utilizing permanent life insurance as an asset-building strategy for the future to convert policies into retirement vehicles in addition to, and sometimes instead of, income-replacement vehicles. The option to put more money into these sorts of contracts allows greater access to the tax-advantaged cash value within the policy for high-net-worth individuals who aren’t as concerned with the death benefit offered by a life insurance policy.
Conclusion
As part of your overall wealth management strategy, life insurance can be a significant tool in the developing, protecting, and transferring of wealth. Your relationship manager can assist you in determining how permanent life insurance fits into your financial portfolio as a tool for reaching your wealth management goals and objectives.
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Is life insurance an asset class?
Are you looking for an answer to the question, “Can I utilize permanent life insurance as an asset class?” on Google?
The good news is that permanent life insurance can be used as an asset class. However, there is a catch. Only permanent life insurance policies with accrued cash value, of which there are two types: whole life insurance and universal life insurance, are considered assets.
Does this imply that we endorse both types? That’s not the case. We don’t even sell whole life insurance (and you shouldn’t ask for it), because universal life insurance is a far better fit for today’s opportunities. This is why:
Whole life insurance is outdated.
We don’t sell whole life insurance because it’s little more than a glorified CD, and we help our customers figure out how to use permanent life insurance as an asset class. What’s the problem with that? There’s nothing wrong with perpetual life insurance as an asset class; it’s just not as dynamic.
What’s our advice? A variable universal life (VUL) policy or an indexed universal life (IUL) policy are the two options. If you want to use permanent life insurance as an asset class, you have two choices. The main distinction between the two is as follows.
IUL (Indexed Universal Life Insurance): An IUL is a type of life insurance that allows you to earn highbut safereturns on your premiums. Growth is usually in line with the market, but you’re protected on the downside by a minimal floor. In essence, you’ll never lose money, and your annual returns might be as high as 8% to 12%.
Variable Universal Life Insurance (VUL): With a VUL, you can choose how your cash value is invested. Each policy comes with a prospectus outlining investment possibilities that include everything from S&P 500 indices and growth funds to alternative asset classes like real estate investment funds.
Are you interested in learning more about the many types of permanent life insurance? Check out the rest of our tutorial here >>
Permanent Life Insurance As An Asset Class: The Benefits
So, let’s say you decide to invest in a permanent life insurance coverage. What are the advantages?
- Growth that is tax-free. Your permanent policy allows you to receive tax-free growth after a specified period of time, in addition to growing your cash worth. Most insurance companies give you a time range of 10-15 years after you start your policy.
- People you care about will receive a tax-free death benefit. Permanent life insurance also include a death benefit, so you’ll be able to pass your wealth to your beneficiaries if you lock in a policy that will never expire and continue to pay your premiums.
- Economic condition protection (if IUL): An IUL allows your cash value to expand while also providing a floor. That way, no matter how the market performs, you’ll never have to worry about losing it all.
- Market growth (if VUL): With a VUL, you’ll have the option of choose how to invest your premiums and then experiencing market highs exactly as you want.
A permanent life insurance policy, unlike other ways to save for college, provides a cash value that may be used for anythingnot only college. What is the significance of this? Because you never know what your children will do in the long run, and if you save in a 529, you must use it for education. What if your child is awarded a scholarship? What if they choose to start a business rather than get a degree?
You can start as early as you like with a permanent life insurance policy (yes, even babies can have one!) and still have a flexible, tax-advantaged account to grow money for your children.
Permanent Life Insurance As An Asset Class: By The Numbers
- With a historical growth rate of 4%, the net return on permanent life insurance at age 65 is $416,402.19.
- In a perpetual life policy, the total payout (death benefit + cash saved) at age 65 is $516,402.19.
Permanent Life Insurance As An Asset Class: FAQs
Do you have any additional questions? We have more information. Explore some frequently asked questions about permanent life insurance as an asset class in the sections below.
In a perpetual life insurance policy, you withdraw your principle and then take out a loan on the remaining portion of your policy, keeping the tax-free growth status. If you’re acquainted with Roth IRA tax status, this is similar, with the exception that you can earn as much as you like in annual income. Depending on your carrier, you can gain access to this anywhere from 10 to 15 years after signing your insurance.
If you start your insurance when you’re in your twenties or thirties, you’ll be able to use it when you’re in your forties or fifties. This sort of savings offers greater freedom than a 401K, which you can’t access until you’re 59.5 years old.
Q: What is the benefit to people who have used up all of their tax-advantaged retirement accounts?
When it comes to permanent life insurance, the subject of IUL vs VUL is frequently asked. The decision is based on whether you choose stable returns from tried-and-true index funds with no danger of losing money, or the ability to invest your capital in higher-risk equities and bonds with infinite upside but the risk of losing money. How you view VUL insurance benefits and cons, as well as which coverage is best for you, is determined by how much risk you’re ready to take on. You’re looking at tax-free growth in any case!
Q: How does an indexed universal life insurance policy differ from a Roth IRA?
It all boils down to two factors: earnings and risk. Roth IRAs are popular investing and savings vehicles for people who earn less than a particular amount of money each year. Anyone earning less than $125,000 per year is eligible for a Roth IRA. For the vast majority of us, the income limit has little bearing, but when you consider that the maximum deposit you may make to your Roth IRA is only $6K, it becomes a bit more restrictive. The other distinction is risk; unlike an IUL insurance, market changes might cause your investment to lose value. An IUL offers tax-deferred growth similar to a Roth IRA, but there are no income requirements, no deposit limits, and because they’re linked to index funds, they’re guaranteed to have a minimum of 0% returns, which means you’ll never lose money.
Even if you don’t recall anything else, here are three key points to remember about permanent life insurance as an asset class:
Takeaway #1: Permanent life insurance is different from whole life insurance in that it allows you to develop while also safeguarding your downside, whereas whole life insurance products are more or less like a CD.
Takeaway #2: For the first 10-15 years after signing your policy, you can access your cash worth tax-free. Use the cash first, then if you need more, you can take out a no-interest loan against your policy.
Takeaway #3: Look for other methods to save for retirement, especially if you’ve exhausted your tax-advantaged options.
What type of life insurance is an asset?
Cash value life insurance is a sort of asset. Because you can withdraw funds from your cash value life insurance policy while you’re still alive, it’s considered a liquid asset.
Is life insurance considered personal property?
A life insurance policy is evidence of a monetary worth, hence it is considered intangible personal property. The proceeds of a life insurance policy, on the other hand, do not go through probate if the beneficiary is a person.
Countable Assets
A single Medicaid applicant who is 65 or older can generally hold up to $2,000 in countable assets in order to qualify financially. Certain assets are considered exempt or ineligible by Medicaid programs “inexplicable” (usually up to a specific allowable amount). Any assets, such as cash, savings, investments, and real estate, that exceed these restrictions are deemed assets “The applicant’s $2,000 resource limit is based on “countable” assets.
Keep in mind that when it comes to setting asset restrictions, states have some leeway. A single New York State Medicaid applicant who is blind, crippled, or over the age of 65, for example, is allowed to keep $16,800 in liquid assets. The asset test for elderly and handicapped people will be phased out of California’s Medicaid program, known as Medi-Cal, starting this year. The $2,000 asset limit for an individual application will increase to $130,000 on July 1, 2022. The asset test will be phased out completely by 2024, according to Medi-Cal.
Married couple limits are much more difficult, varying by state, Medicaid program, and whether one or both spouses apply for Medicaid.
Primary Residence
If an applicant’s principal residence passes a few basic criteria, it is exempt. First, the house must be in the same state as the owner’s Medicaid application.
Second, the applicant’s equity in their house must be $636,000 or less (fair market value minus debts if owned solely), while certain jurisdictions have greater restrictions of up to $955,000. On primary properties, Medi-Cal does not impose a maximum equity value cap.
Third, if the applicant is hospitalized, recovering at a senior rehabilitation facility, or living in a nursing home, they must either stay in their primary house or demonstrate a “intend to return home.” If a Medicaid applicant’s spouse or dependent child lives in the home after they are admitted to a nursing facility, the home is considered exempt, regardless of its worth.
Does whole life insurance count as an asset?
You might be wondering whether your life insurance policy is an asset or a liability if you have one. After all, you may have to pay a monthly fee for it. Yes, life insurance can be considered an asset if it builds up monetary value. So, what is the monetary value of something? When you buy a permanent life insurance policy, you can put a portion of your premiums into a tax-deferred savings account. This money will be able to earn interest and grow in value over time. It’s called cash value because you can access the money by either withdrawing it and surrendering the insurance or taking out a loan against it.
In terms of how your money grows, cash value life insurance products are not the same. You have the following alternatives when it comes to choosing a cash value policy:
- Throughout one’s life. Your premiums in a whole life insurance policy may remain the same over time. When a policy is issued, the death benefits and cash value may be guaranteed.
- Life is universal. Premiums on a universal life insurance policy can be adjusted as needed. However, because the amount of interest credit to your account may fluctuate over time, estimating how much cash worth you’ll accumulate is difficult. Some universal life insurance policies are indexed, which means they are designed to mirror or replicate a stock market index like the S&P 500.
- Life expectancy is variable. You can choose which mutual funds to invest in with a variable life policy. Returns aren’t assured, though, because the price of those funds can rise or fall over time, resulting in a loss of capital.
Interest earnings are tax-deferred regardless of which form of cash value policy you have. There are a few alternatives for how you might use this cash value.
You may decide to pay your coverage premiums using the cash value. This means you won’t have to pay anything out of pocket for them. This, however, anticipates that your cash value will increase over time and earn interest.
Withdrawing cash value is also a possibility. The disadvantage is that removing cash value diminishes the death benefit of your policy. So, if you have a $500,000 insurance and take out $25,000 in cash value, your beneficiaries will only receive $475,000 when you pass away.
Taking a loan instead does not necessarily reduce the death benefit of the policy, as long as it is repaid. If you’re seeking for a liquid asset, the alternative of taking a loan from your insurance can be intriguing. Selling stocks, dipping into an IRA, or cashing out certificates of deposit may be more convenient than taking out a loan from your policy.
What assets are exempt from Medicare?
The applicant’s assets are not fully tallied toward Medicaid’s asset limit. It’s crucial to understand which assets are counted and which aren’t when evaluating if someone has over their asset limit.
Countable (non-exempt) assets are included in the asset limit calculation. They’re also known as liquid assets, which are assets that can be changed into cash quickly. Cash, bank accounts (checking, money market, savings), vacation homes and other non-primary dwelling property, mutual funds, stocks, bonds, and certificates of deposit are all countable assets. 401Ks and IRAs are recognized countable assets in about 39 states. The remaining states allow these retirement funds to be tax-free, although several of them require that they be in the process of being paid out. More information can be found here.
Non-countable (exempt) assets are not included in the asset limit set by Medicaid. Exempt assets include a person’s principal residence, as long as the Medicaid applicant or their spouse resides there. Some states consider an applicant’s desire to return home as an exempt asset. If a non-applicant spouse does not live in the home, there is also a home equity interest limit for exemption purposes. The market worth of one’s home minus any loan against it is the home equity value. The applicant’s equity stake is the portion of the home equity worth that he or she owns. In 2022, the equity interest cannot be more than $636,000 or $955,000, depending on the state. California is the only state that does not have a cap on home equity interest. Pre-paid burial and funeral expenditures, an automobile, term life insurance, life insurance policies with a combined cash value of less than $1,500, household furnishings / appliances, and personal things such as clothing and engagement / wedding rings are all examples of exempt assets.
The asset restriction does not apply to assets held in irrevocable trusts or Asset Protection Trusts.
Is life insurance a liquid asset?
Assets that can be changed to cash quickly and readily without losing value are known as liquid assets. Checking and savings accounts are the most typical liquid assets since they allow you to withdraw funds as needed. For this reason, emergency funds are frequently maintained in savings or money market accounts.
Other liquid assets include cash-value life insurance plans, savings bonds, equities, and certificates of deposit with no penalty for early withdrawal.
Because fixed assets are not easily convertible to cash, they are less accessible than liquid assets. When it comes to selling fixed assets, rushing the process can result in a loss. Fixed assets include art or antique collections, jewelry, and real estate, such as your home.
Is insurance an asset or expense?
The policies are designed to protect not only the company’s property and products, but also its employees. Premiums are required for all plans. They must be documented as an expense if they expire. Prepaid insurance, which is included in an asset account, should be used to account for unexpired premiums.