How to use life insurance as a financial asset

More than half of Americans – 52% – were covered by life insurance as of 20231. When you think of life insurance, your first thought may be about supporting your loved ones in the event of your death, but some life insurance policies can become a financial asset for you to use during your life, just like an IRA or mutual fund. These life insurance policies allow the owner to build cash value over time and provide access to cash value. In some cases, you can take a withdrawal, and in others, you can borrow against your policy; and if you do it right, you can avoid a tax liability, too.2

Of course, not all life insurance policies are created equal. If you’re shopping for a policy that’s right for you and want to make sure you’re choosing one that can serve as an asset, you should only consider policies that have a cash value. Typically, only permanent insurance policies fall under this umbrella – term insurance policies, which are generally less expensive and valid for a set number of years, don’t offer the ability to grow money in an account that you can tap into.

Here’s a breakdown on some of the policies that can serve as an asset, how it works when you want to tap into them and what to watch out for.

The life insurance policies that can serve as an asset

Permanent life insurance policies enable you to invest in conservative investments like mutual funds or exchange-traded funds (ETFs). You can choose how you want to diversify your investments, allowing you to curate your policy to meet your risk tolerance and goals. Because of this, permanent life insurance can serve as a hedge against market risk.3

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There are two main types of permanent life insurance that can be used as an asset: whole life insurance and universal life insurance.

Whole life insurance. This is the most common type of permanent life insurance, which, in addition to a death benefit, offers the policy holder the ability to accumulate cash value. This works because a portion of the premium you’ll pay every month gets put into a cash value account. Think of it as an insurance policy with a saving account-like component. Your cash value will accumulate over time at a minimum guaranteed rate indicated by your policy. Just make sure you read the fine print of your policy to understand what that is. Also noteworthy, the premiums on these policies typically won’t increase over the life of the policy.4

Universal life Insurance. Universal life policies function similarly to whole life – they allow policy holders to grow an asset by accruing interest over time that can be borrowed against5. Keep in mind that, with universal life policies, the premiums aren’t set, which means they are subject to change, and there’s also no guarantees on the rate your money will earn over time. Under the universal life umbrella is something called “variable universal life insurance,” which enables policy owners to invest their earnings into the accounts of their choosing (including mutual funds), so you have the potential to earn more over time6.

How to use your life insurance as an asset

There are several ways to use your life insurance as an asset. As you contribute to your policy over the years, you earn the ability to borrow against what you’ve saved. Also, all your earnings are growing on a tax-deferred basis. Here’s a look at some of the ways to maximize your asset’s potential.

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Take a loan from your policy. You can borrow against the cash value of your permanent life insurance policy. Just read the fine print if you go this route. The interest rate can be fixed or variable, and it is set by the insurer. Also, if you take a loan against your policy and it’s not paid off at the time of your death, any outstanding balance that you owe gets subtracted from what your beneficiaries inherit.

Use your policy as collateral for a loan. In some situations, you can use your life insurance policy as collateral for a loan, which can make it easier for you to get approved or perhaps get you a better rate on the loan you’re taking out. (Essentially, your life insurance policy is serving as an asset to prove your trustworthiness as a borrower.) But keep in mind that, if you die before paying it back, whatever you still owe will come off the top before your beneficiaries see their benefit.

Withdraw funds. Rather than taking a loan that must be paid back, you can also simply make withdrawals from your policy that are yours to keep – just note that, if your withdrawal is an amount great enough to dip into your investment gains, you’ll need to pay taxes. (And like a loan, the amount you withdraw is money that won’t be paid to your beneficiaries later, because your withdrawal decreases the value of the policy.)

Option for “accelerated” benefits. Some policies enable you to receive your benefits during your lifetime should an unexpected or extreme medical emergency arise, such as cancer, a heart attack or kidney failure. Most policies with this option allow you to withdraw anywhere from 25%-100% of your policy’s value.

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Surrender the policy (cash out). To say that you’re “surrendering” a policy is simply another way of saying you’re canceling your coverage. When you do this, you get back the cash value you put in, less any fees your insurance company may charge. Just study the fine print carefully, because in some cases those fees may be quite high. (Think of it like an early withdrawal from a retirement account – you know there will be penalties.) With that said, if you no longer want to maintain your policy and have other more pressing needs for that money, surrendering can be a solid option.

As always, remember to speak with a J.P. Morgan advisor or a tax professional when you have any questions.