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There are several different scenarios where your assets can have an affect on the type of assistance that you qualify for or how much your estate will be taxed during the probate process. Since your net worth can have a huge impact on your access to things like medical care, knowing how the life insurance that you carry can add to your worth as an asset is critical. Many people do not think about how their life insurance will be treated years down the line while they are selecting a policy type, but this is a very important consideration to keep in mind before you are forced to let go of your family’s financial protection just to afford the care that you need today. Start comparing life insurance rates now by using our FREE tool above!
There are ways that you can set up your life insurance portfolio so that the coverage that you carry will not be treated as an asset either before your death or after. Knowing how the choices that you make as you are quoting and applying for coverage can help you avoid some major mistakes that will cost you and your family a great deal of money. Read this guide to when and how life insurance can be treated as an asset so that you know the steps that you should take as you are shopping for coverage.
When Life Insurance Being Counted as a Living Asset Matters
Before you even learn which types of policies can be treated as assets, you need to understand why having policy proceeds or values counted in your net worth really even matters. If you are applying for any type of government benefits, medical benefits, or financial aid for students, you need to know how your life insurance might be counted and how the agency’s treatment of your policy will affect how you qualify. Here is a breakdown of which agencies and even private companies may ask about your insurance and count it towards your worth:
- Medicaid and Medicare
Medicaid is a government entitlement program that can help those who have low or moderate incomes secure health insurance. While the criteria for this needs-based assistance will vary from state to state, to be considered eligible you must go through an asset assessment. The healthcare criteria has recently changed because of the eligibility expansions created by the Affordable Care Act.
Since eligibility is being extended to more individuals, both the applicant’s income and their resources will be considered.
One of the resources that will use during eligibility determination is life insurance, which is counted as an asset in some cases. In the world of Medicaid, this is classified as an “unqualified asset”, which increases your income and the amount you must pay for expenses out of pocket.
- Long-term Care Benefit Plan
If you qualify for disability through Social Security or Long-term Care Coverage, there is not an expanded criteria that required life insurance to be considered. When there is a life insurance plan in place, however, to use the Long-Term Care Benefit Plan through Medicaid you may be forced to convert your policy to pay for current care costs before the benefit is awarded. Doing this is a qualified way to “spend down” assets while still leaving some of the death benefit accessible to beneficiaries. If you do not have a private long-term care insurance plan and are relying on state-funded monies, this is something to seriously consider as you are buying your life cover.
- Federal and State Financial Aide for College Students
If you are applying for student aid through the federal government or for a grant through your state, you might automatically assume that life insurance is something that the school’s financial aid department will consider. In actuality, even though cash value life insurance is a popular way to fund college expenses, life insurance does not count as asset allocation is being reviewed for a grant or student loan. This means that you may have a large policy that you can borrow against and still have no worries that it will affect your financial aid status. This life insurance policy is sheltered from the needs-based analysis so there is no impact.
- Mortgage Loans through Insured Lenders
One private company that will take certain life insurance plans into consideration is a mortgage lender. These insured institutions need to get a good look at the big picture as to whether or not the applicant can afford to repay a loan before they qualify them and extend an offer. In addition to reviewing the applicant’s credit score, debt-to-income ratio, and income, the lender will consider some aspects of a life insurance plan as an asset. While having insurance that can be allocated as an asset hurts you when looking for aid, it can help you if you want to qualify for a mortgage and secure your approval after your application has been underwritten.
What types of life insurance can be considered an asset of the owner?
Now that you know what agencies and private companies will look at life insurance as a resource, you should know what types of life insurance make you vulnerable. All too often, individuals assume that just because life insurance is considered that all policies will raise your worth.
A common misconception is that life insurance is automatically an asset, but not all policies have components that can be accessed while you are living.
Life insurance may be the new asset class for assistance and for various loans, but only one category of insurance will affect you: permanent insurance plans. Term life is not considered or treated as an asset except in very unique scenarios.
What is permanent insurance?
There are two categories of life coverage: permanent and term life. When you buy a permanent life insurance policy, you will pay higher premiums to secure your coverage for the remainder of your living days. A portion of the premiums that you pay are going to be used to pay for pure life insurance costs. The remaining portion of the premiums is placed in an investment account where it earns interest and accumulates value. Since whole life, universal life and variable universal life policies all have a savings component, they are all classified as permanent insurance and therefore considered assets.
Why is permanent insurance considered an asset?
Permanent insurance is considered an asset because it can be a resource that can be accessed to pay for expenses while you are living. While the entire policy is not an asset, components like the policy’s cash value is. If you were to ask your insurer what the cash surrender value of your policy is, this is the amount that will be classified as a financial resource.
Some agencies may allow applicants to exclude up to $1500 in cash values as part of the burial set-aside rule, but the remainder can be counted in the decision-making. If you choose a permanent cash value life insurance plan over the alternative, you need to be ready to deal with issues concerning your assets when it is time to apply for Medicaid.
What is term life insurance?
Term life insurance is the most common type of insurance sold throughout the United States. It is very inexpensive and is only in effect for a temporary period of time, known as the term. Term lengths range between 1 and 40 years, depending on the carrier. The longer the term, the higher the premiums typically are. What attracts many to this basic financial tool is that the premiums will remain level for a stated period of time and the premiums are affordable. Term life insurance policies create less of a nightmare during asset analysis because most policies have no living benefits.
Is term insurance ever considered an asset?
Term insurance might ever accumulate cash value, but there are some unique scenarios where term life benefits can have some type of effect. This exception of the rule is when you have selected an accelerated death benefit rider within the policy and this benefit is currently being paid out. The accelerated death benefit is a special rider that will give the insured access to the face amount of the policy while they are living if specific conditions are met.
The advanced amount of the death benefit is classified as an asset until that money is spent on covered costs. This benefit can also be counted as income, which is important to know when you want to know the tax implications.
When your policy pays out after your death, the payout is considered an asset of the beneficiary. This can still be an asset in your estate if you do not name a beneficiary. If you are ready to choose a life insurance policy, now is the time to compare premiums. Use an online tool to price permanent and term plans, and then you can decide which route you would like to go to protect your family and loved ones. Start comparing life insurance rates now by entering your zip code in our FREE tool below!