June 17, 2024
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Life Insurance: Asset or Liability?

In his 1997 bestseller, Rich Dad, Poor Dad, Robert Kiyosaki put forward a simple formula for financial success:

“You must know the difference between an asset and a liability, and buy assets. If you want to be rich, it is all you need to know. It is Rule No. 1. It is the only rule.”

Kiyosaki’s elaboration on Rule No. 1 was equally concise:

  • An asset is something that puts money in my pocket.
  • A liability is something that takes money out of my pocket.

For Kiyosaki, the biggest financial challenge most Americans face is their “financial illiteracy,” their inability to distinguish between assets and liabilities. His classic example is a personal residence: Is it an asset or liability? Especially for those in the middle class, a home is often mentioned as one’s “greatest asset,” based on the amount of equity that usually accrues over time. But Kiyosaki disputes this notion, because maintaining a personal residence takes a lot of money out-of-pocket (in the form of mortgage interest, property taxes, maintenance costs, etc.), and puts no money back in—until the home is sold.

Some accounting professionals have taken issue with Kiyosaki’s definition of assets and liabilities, primarily because of its focus on immediate return as opposed to future value. Kiyosaki has acknowledged this difference, saying he is primarily interested in the cash flow that results from a transaction, not a speculative future value.

But applying Kiyosaki’s simple asset-or-liability litmus test to other financial instruments can generate some interesting discussion. For example:

Is life insurance an asset or a liability?

In light of Kiyosaki’s “in-my-pocket or out-of-my-pocket” definition, an answer requires some careful thought. A life insurance policy can be:

  1. A current asset or a liability for the policy owner.
  2. A future asset for the beneficiaries.

When a prospective borrower provides financial information for a lender, life insurance cash values are considered assets. And the regular dividends1 paid to cash value policyholders could be considered “putting money in your pocket,” too. So, life insurance cash values probably fit the Kiyosaki definition of an asset.

The life insurance benefit can be an asset to the beneficiaries, but only if the insured dies while the policy is in force. The question is when the insurance benefit will become an asset; it could happen in the next minute, or far in the future. Thus, the death benefit should perhaps be classified as a potential asset for beneficiaries.

But many insurance policies are surrendered before the death of the insured. When a policy is surrendered, any insurance benefit intended for beneficiaries is gone. And the premiums which were paid to secure the life insurance benefit retroactively become liabilities, money out of your pocket.

This quick “asset-or-liability” analysis presents several relevant conclusions:

Keeping a life insurance policy in force until the death of the insured is the only way to guarantee it will realize its full value as an asset. Every life insurance policy, term or permanent, includes an “insurance cost,” the amount kept in reserve to cover the death of the insured, should it occur. Keeping a policy in-force until death is the only way to guarantee an asset will be the end result of incurring these insurance costs. Some term policies may offer a return-of-premium feature, and some permanent policies may project cash values that exceed the total premiums paid. But these adjustments obscure the fundamental equation of life insurance: A premium is paid for the promise of a benefit in the event of the insured’s death. If you don’t collect a benefit after paying for it, surrendered life insurance seems to fit Kiyosaki’s definition of a liability.

Life insurance may have a positive “ripple effect” on other assets. In the 1990s, global chemical manufacturer BASF had a marketing campaign that said “We don’t make a lot of the products you buy, we make a lot of the products you buy better.” Properly positioned, a life insurance policy can be a lot like that slogan: It can make a lot of other assets perform better.

This synergy occurs because a permanent life insurance benefit means a guaranteed financial event will coincide with the death of the insured. This guaranteed “final transaction” can have powerful, positive ramifications on other financial assets. For example:

If a lender offers more money or better terms because a borrower uses a life insurance benefit as collateral (to ensure the lender will be repaid in the event of the borrower’s death), you might say the life insurance put more money in the borrower’s pocket.

If having life insurance allows a pension recipient to take the “life only” option instead of “life and joint survivor” at retirement, the extra monthly income (money in the pocket) occurred because of life insurance.

Similarly, if a guaranteed2 life insurance benefit will serve as an inheritance for heirs, one might feel free to “spend down” other assets instead of conserving principal.

Whenever life insurance permits the increased “spend-ability” of other assets, the result is more money in your pocket.

However…if you buy term life insurance, remain alive, and surrender the policy (because the term has expired, premiums are too high, you no longer want the coverage, etc.), life insurance will become a financial liability. Money will have left your pocket to pay premiums and you will receive nothing in return. And the cost of incurring this liability will not be just the premiums, but the opportunity cost—what those premiums could have been worth if they had been used to buy an asset instead.

That said, there may be times when term life insurance is a necessary and beneficial purchase—even as a “liability.” Obtaining immediate financial protection against an untimely death can provide an intangible asset: peace of mind. The long-term financial result may project as a total loss, but the near-term risk—“What would happen if I died tomorrow?”—necessitates a response.

Whether or not life insurance is an asset depends on you. With the help of a financial professional, you can choose to structure your life insurance program so that it performs like an asset, or a liability.

  1. Dividends are not guaranteed. They are declared annually by the insurance company’s board of directors.
  2. All life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company.

2017-37872 Exp. 3/2019

This article was prepared by an independent third party. Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.

Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 355 Lexington Avenue, 9 Fl., New York, NY 10017, 212-541-8800. Securities products/services and advisory services offered through PAS, a registered broker/dealer and investment adviser. Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. Wealth Advisory Group LLC is not an affiliate or subsidiary of PAS or Guardian.

PAS is a member FINRA, SIPC.

Neither Guardian, PAS, Wealth Advisory Group, their affiliates/subsidiaries, nor their representatives render tax or legal advice. Please consult your own independent CPA/accountant/tax adviser and/or your attorney for advice concerning your particular circumstances.

2017-40475 Exp. 03-2019

Submitted by Elozor Preil


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