Life insurance has helped keep the financial wolf from the door for numerous widows, widowers and children. It comes in many varieties, including whole life and term life. While whole life is permanent, term life provides protection for a limited period -- for example, 20 years. If you die before the term ends, your heirs can collect. However, you can't count your term life insurance as net worth during your lifetime.
Assets Minus Liabilities
Your net worth is the difference between everything you own, called your assets, and what you owe, called your debts or liabilities. For example, your assets would include your home, car, personal property, retirement accounts, mutual funds, bank accounts and other investments. Total up the current value of these assets, such as the value of your IRAs, according to recent statements. Subtract everything you owe from this total, including mortgages, car loans, student loans, credit cards and personal loans. If the difference is a positive number, such as $10,000, you have a positive net worth.
Insurance as an Asset
Some life insurance policies count as assets for net worth because they have a cash value. Whole life, universal life, variable life and universal variable life insurance build up a cash value. The amount of this value depends on the terms of your policy and the return on investments made by the insurance company. If you have one of these policies, add the cash value of the policy on your most recent statement to the asset side of your net worth worksheet.
Term life insurance is pure insurance without any cash value. If you have a term life policy, there's nothing to count on the asset side of your balance sheet. However, your monthly premiums aren't wasted because they provide an inheritance for your beneficiaries if you die during the term. If you're the beneficiary of someone else's term life policy, you can't count the policy as an asset until the policyholder dies and you claim the money.
The Value Advantage
Although it's not an investment, term life insurance provides affordable protection when you most need it. For example, when you're just starting your career, you may have low earnings. If you're also buying your first home and raising a family, you'll need to make every dollar count. Term life insurance is the cheapest form of life insurance, making it the best buy for a tight budget.
Net Worth as Insurance
Building your net worth over time can help you outgrow the need for term life insurance. For example, you can save money on monthly insurance premiums by choosing term life over whole life and invest the difference in a savings account. You can grow your net worth even faster by maxing out your retirement plan and paying off your mortgage or other debts as quickly as possible. After 20 years, your net worth may be enough to keep your heirs well-heeled and thus eliminate the need for life insurance.
- CNN Money: What Is Term Life Insurance?
- Bankrate.com: When to Terminate a Term Life Policy
- Morningstar: Net Worth Worksheet
- CNN Money: What is Whole Life Insurance?
- CNN Money: What Is Universal Life Insurance?
- CNN Money: What Is Variable Life Insurance
- Bankrate.com: Net Worth Calculator
- USA.gov: Life Insurance