Yes, a life insurance policy is an asset — but only certain types, and only under specific conditions

A permanent life insurance policy (whole life, universal life, or variable universal life) is a genuine asset you own. It has a cash value that grows over time, you can borrow against it, and you can sell it. A term life insurance policy is not an asset in the same way — it has no cash value and expires when the term ends, so there is nothing to own after that point.

The distinction matters because it affects what you can actually do with the policy and how it shows up on your balance sheet if you are applying for a loan or managing an estate. A permanent policy sits somewhere between a savings account and an investment: you pay premiums, some of that money builds up inside the policy as cash value, and you can access that money if you need it.

A term policy is pure insurance — you pay for coverage, and if you die during the term, your beneficiary gets paid. If you live past the term, the policy ends and you have nothing left.

Key Takeaways

  • Permanent life insurance policies have cash value that belongs to you and can be borrowed against, surrendered for cash, or sold to a third party.
  • Term life insurance has no cash value and is not considered an asset once the policy term ends.
  • Lenders and creditors may count permanent life insurance cash value as an asset when you apply for credit or in bankruptcy proceedings.
  • You can take a loan against your permanent policy's cash value without surrendering the policy, though the loan accrues interest and reduces the death benefit.
  • Selling a permanent policy to a third party (called a life settlement) is possible but typically only makes financial sense if you are older or in poor health.

How permanent life insurance becomes an asset

When you buy a permanent life insurance policy, part of your premium payment goes toward the death benefit and part goes into a cash value account inside the policy. That cash value grows tax-deferred, meaning you do not pay income tax on the growth while the money sits in the policy. Over time, the cash value can become substantial — sometimes tens of thousands of dollars.

This cash value is yours. You own it. The insurance company holds it, but it is not their money. That is what makes the policy an asset: you have a claim on real money that exists right now, not just a promise of a payout if you die.

The cash value grows at different rates depending on the type of permanent policy. Whole life policies have a may provide minimum growth rate set by the insurance company. Universal life policies often tie the growth rate to market indexes or interest rates, so the growth can vary year to year. Variable universal life policies let you direct the cash value into investment subaccounts, similar to a 401(k), so growth depends on how those investments perform.

What you can do with a permanent policy's cash value

You have three main options for accessing the cash value in a permanent life insurance policy. The first is to surrender the policy, which means you cancel it and the insurance company sends you the cash value minus any outstanding loans or fees. Once you surrender, the policy is gone — there is no more death benefit. This makes sense only if you no longer need the insurance or need the cash urgently.

The second option is to take a policy loan. You borrow money from the insurance company using your cash value as collateral. You do not have to pay back the loan on any set schedule, and you do not have to prove you can repay it — the insurance company will simply deduct the loan amount plus interest from your death benefit when you die. This is useful if you need cash but want to keep the insurance in force. The downside is that the loan accrues interest (usually 5 to 8 percent annually, depending on the policy), and if the loan grows large enough, it can eventually consume the entire cash value and cause the policy to lapse.

The third option is to sell the policy to a third party through what is called a life settlement. A company or investor buys your policy, takes over the premium payments, and collects the death benefit when you die. You receive a lump sum payment, which is typically more than the cash surrender value but less than the death benefit. Life settlements are most common for people over 65 or those with serious health conditions, because the buyer is betting on when you will die and wants a reasonable window to recoup their investment.

How lenders and creditors view life insurance as an asset

When you apply for a mortgage, car loan, or other credit, lenders may ask about life insurance. If you have a permanent policy with significant cash value, they will often count it as an asset on your balance sheet. This can help your application because it shows you have liquid or semi-liquid resources to fall back on if you cannot make payments.

In bankruptcy proceedings, a permanent life insurance policy's cash value is considered property of the estate and may be subject to creditor claims, depending on your state's laws. Some states have exemptions that protect a certain amount of life insurance cash value, but the rules vary widely. If you are facing financial hardship, it is worth asking a bankruptcy attorney whether your policy will be at risk.

For federal student loans and need-based financial aid, life insurance cash value is typically counted as an asset when calculating how much aid you are may have access to to receive. The more cash value you have, the less aid you may receive.

Why term life insurance is not an asset

Term life insurance is temporary coverage with a fixed expiration date — usually 10, 20, or 30 years. You pay a premium for that period, and if you die during the term, your beneficiary receives the death benefit. If you live past the term, the policy expires and you receive nothing.

Because term policies have no cash value, they have no resale value and cannot be borrowed against. Once the term ends, the policy is worthless — you cannot surrender it for cash or sell it to anyone. This is why term insurance is not considered an asset. You are paying for temporary protection, not building equity.

Some term policies include a conversion option, which allows you to convert the policy to a permanent policy without a medical exam. If you exercise that option, you then own a permanent policy with cash value. But the term policy itself, before conversion, is not an asset.

The tax implications of accessing your policy's cash value

If you surrender a permanent policy or take a policy loan, the tax treatment depends on how much cash value you withdraw relative to how much you have paid in premiums. Money you withdraw up to the amount of your total premiums is generally not taxable. Money withdrawn above that amount may be subject to income tax.

For example, if you have paid $50,000 in premiums over the years and your policy's cash value is now $80,000, you can withdraw up to $50,000 tax-free. Anything above that $50,000 is taxable income in the year you withdraw it. Policy loans are not immediately taxable, but if the loan exceeds your basis (the premiums you paid), the excess is taxable when the policy lapses or is surrendered.

These rules are complex and vary depending on when the policy was issued and how it has been structured. Before you access your cash value, it is worth consulting a tax professional or your insurance agent to understand the tax consequences.

Frequently Asked Questions

Can I use my life insurance policy as collateral for a loan?

Yes, but only if it is a permanent policy with cash value. You can take a policy loan directly from the insurance company, or in some cases you can use the cash value as collateral for a bank loan. A policy loan is simpler because the insurance company already knows the value and does not require a credit check or income verification.

What happens to my life insurance if I declare bankruptcy?

The answer depends on your state and the type of policy. Permanent policies with cash value may be considered property of the bankruptcy estate and subject to creditor claims, though many states exempt a certain amount. Term policies, which have no cash value, are generally not affected. Consult a bankruptcy attorney in your state to understand your specific situation.

If I stop paying premiums on a permanent policy, do I lose the cash value?

No. If you stop paying premiums, the insurance company will use your cash value to pay the premiums automatically until the cash value runs out. At that point, the policy lapses. You can also surrender the policy at any time and receive the remaining cash value as a lump sum payment.

Can I borrow against a term life insurance policy?

No. Term policies have no cash value, so there is nothing to borrow against. Only permanent policies (whole life, universal life, variable universal life) allow policy loans.

Is the death benefit from life insurance considered an asset?

The death benefit itself is not an asset until someone dies and the claim is paid. The cash value inside a permanent policy is an asset because it exists right now and you can access it. The death benefit is a future promise, not a current asset.