When is your life insurance policy considered an asset?
There are times when you want to display greater wealth. For example, a higher net worth can help you qualify for a mortgage in order to buy your dream home.
Other times you may want to hide your wealth. For example, a lower net worth makes it easier to qualify for college student financial aid, SSI, and Medicaid.
Learn the rules on both sides of the fence as they apply to permanent vs term policies.
Is Life Insurance Considered an Asset?
Life insurance can be considered an asset when you want to reflect greater wealth. An asset is a resource with economic value that an individual, corporation owns or controls with the expectation that it will provide a future benefit.
Individuals often include assets when calculating net worth. Appearing to be wealthy is generally a good thing. For example, a high net worth helps when applying for a mortgage, financing a car, taking out a personal loan, or bragging at a cocktail party.
Permanent life insurance policies always count as an asset. Universal and whole life insurance both accumulate cash value with tax-deferred interest and allow the insured to convert the coverage into currency at any time while still alive.
- Take a loan against the accumulated cash value in the contract
- Cancel the coverage and receive the cash surrender value in return
- Tap into accelerated death benefit if diagnosed with a terminal condition
You calculate the cash surrender value by subtracting any outstanding loans and accrued interest from the total cash value in the contract. For example, you may have to perform this calculation when dividing assets during a divorce settlement.
Term life insurance policies count as an asset only when the owner has a terminal illness. A terminal illness means a sickness or injury, which results in a life expectancy of fewer than 12 months with no reasonable chance of recovery.
Term policies do not accumulate cash value, and you cannot get your money back when you surrender the coverage – unless the policy has a return of premium feature. However, people with terminal illnesses can convert the coverage to currency while still alive using two methods.
- Accelerated death benefit (living) advances up to 75% of the face amount
- Viatical settlement companies may purchase the contract
Does Life Insurance Affect Government Benefits
People are less motivated to have their life insurance considered as an asset when government benefits are at stake. In these cases, having a higher net worth could be a bad thing. Many government entitlements have resource limitations, which could affect eligibility and costs.
For example, it helps to appear poor when applying for student financial aid, Social Security Disability, and Medicaid Long-Term Services and Supports.
Student Financial Aid
The Free Application for Student Financial Aid (FAFSA) does not count life insurance as an asset. The federal government uses information from the (FAFSA) form to calculate the Expected Family Contribution (EFC). The college then subtracts the EFC from the cost of attendance to determine your child’s financial need.
The FAFSA form considers earnings and net worth when calculating EFC. However, the instructions explicitly exclude life insurance from the list of resources counting towards net worth!
Therefore, universal life insurance on a child makes for an ideal college savings vehicle. Option B allows for faster cash value accumulation and does not affect financial aid eligibility.
Social Security Disability
People often ask if life insurance affects Social Security Disability benefits. Social Security manages two separate disability programs. Therefore, we must consider the qualifications for both in order to provide a complete answer.
- Social Security Disability Insurance (SSDI) pays benefits to people who worked long enough and paid FICA taxes. SSDI has no resource limit affecting eligibility.
- Supplemental Security Income (SSI) pays benefits based on financial need for people who did not work long enough and pay FICA taxes. SSI does have a resource limit of $2,000 affecting eligibility.
- Bank accounts
- Life Insurance
- Personal property
- Anything else which could be changed into cash
As you can see, any property that you can convert into cash affects SSI but not SSDI eligibility. In addition, the Social Security agency counts life insurance as a resource in its definition.
Therefore, we can conclude that whole and universal policies affect SSI eligibility, but not term coverage.
Government agencies will sometimes consider cash value life insurance as an asset when administering Medicaid for Long-Term Services and Supports (LTSS). LTSS services include institutional care such as a nursing home or assisted living facility as well as community-based long-term care.
Medicaid is a federal program administered at the state level. Therefore, each state sets its own rules, making the answer depend on the state where you live in relation to eligibility, recovery, and beneficiary designations.
Cash value life insurance can affect your eligibility for Medicaid LTSS services. The federal eligibility guidelines follow the SSI model noted above, which explicitly lists life insurance as a countable resource. You may have to convert the policy to cash and spend down the asset in order to qualify for coverage.
Federal Medicaid law requires the states to recover from estates any amounts paid for LTSS services upon the beneficiary’s death. Therefore, Medicaid can claim certain term life insurance proceeds that the company pays out to the estate.
However, the law also places limits on the asset recovery from the deceased’s estate.
- After the death of the surviving spouse
- No surviving child under the age of 21
- No surviving child of any age who is blind or disabled
Good Medicaid planning suggests assigning the term life insurance beneficiaries to named individuals rather than the estate. This way, the claim proceeds flow directly to the beneficiary. The money does not pass through probate, where the state Medicaid office can seize the resource to pay for rendered LTSS services.