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.

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