Most
people don't realize that life insurance
is an asset. In fact, it's the best
kind of asset or more importantly, a
true asset as opposed to say..your
primary residence (with a mortgage
attached). As with all assets, there
are some important things you can do
with it both before and after the
benefit is triggered. Let's take a look
at how life insurance should be viewed
as an asset.
First, what is an asset? Some people
have somewhat of a hazy view while
others are just plain wrong. What about
your primary house? Is that an asset?
Well it depends. If you do not derive any
income from your house and only pay out
due to a liability (your mortgage debt),
then it's hard to call it an asset.
Even when you have full paid off the
mortgage, it's still not ideally what
you would want in an asset. An asset
should pay income. Your primary home
does not pay income. Yes, you're
building value over time but that
doesn't really help you make ends meet
if a primary earner in the family passes
away. In this regard, it's more like a
liability. It all comes down to cash
flow and cash flow is what hits people
so hard when the income suddenly
vanishes due to the unexpected loss of a
family member.
Life insurance on the other hand, can be
the source of income if the insured
passes away. It's also the best kind of
income because it is typically
tax-free. Don't underestimate the
importance of this. If you you earn
$50K annually through salary, it's
probably more like $35K after tax as
you're all too aware of. Average tax
brackets tend to run from 20 to 30%.
Life insurance benefits are generally
not taxable. This means $500K is
$500K. This becomes even more important
since our tax system is "progressive".
This means that the more money "earned",
the higher your average tax rate will
be. It can even approach 50% when
adding federal, state, and so-called
"windfall" tax rates. Congress has
tried to go after this tax-free status
of life insurance but the push-back has
been too great. So we have a tax-free
asset in term life insurance. Why,
would this be an asset? It can create
income. If you take your $500K (to
continue our example) and invest it, at
5% you're looking at $25K annually.
That's income derived from an asset and
it's a critical function of life
insurance.
You can also just spend down this
"asset" if you choose since it's highly
liquid. Selling a house can be a
difficult proposition reliant on market
conditions and other factors (not to
mention the question of where are you
going to live?). The life insurance
benefit is cash. You do not get a more
liquid asset than that. If you spend
down the asset, you will not retain a
residual asset which earns money but you
will have more cash flow in the
meantime. For example, if we spend $50K
each year (to match our replaced
income), we have 10 years at this
level. At a minimum, that gives you a
decade to get your financial house in
order following the passing of a loved
one and the lost income. Many people
without life insurance find themselves
having to make truly life-changing
decisions in a very short span since
they don't have the immediately created
asset that life protection offers.
Again...most people will essentially be
bankrupt in a matter of months if the
family's income disappears or is even
cut in half. Term life provides the
asset and more importantly, the income
to avoid this situation at an affordable
cost. |