Bao An Gongsi

Posts Tagged ‘Investment Vehicles’

Your net worth is the amount of your current liabilities subtracted from the value of your current assets (you gross value). One aspect of calculating your net worth that leads to a lot of confusion relates to insurance policies and annuities. Do these represent assets? Do they represent liabilities? What value should be used?

Assuming you have a cash-value life insurance policy, such as indexed universal life insurance, then your insurance goes into both your gross value calculation as well as your liability calculation. If you do not have a cash-value insurance policy then it is just a liability and should be considered with your other regular expenses. Cash-value policies – which are often touted as useful investment tools for tax purposes – on the other hand, do have a transferable cash-value that should be considered an asset.

The actual cash value of a cash-value life insurance policy is basically a liquid asset that can be bought and sold, merged into other investment vehicles (for example, a viatical), and borrowed against. As such the actual cash value of the policy – not the face value, or coverage value – should be added into your gross value assessment. People frequently use these policies as an investment tool because interest and other amounts realized and credited to the cash value are not usually taxable as income and because loans taken against the cash value are treated as debts as opposed to taxable distributions by the Internal Revenue service (IRS).

At the same time, insurance policies always mandate regular payments and these should be considered liabilities for the purposes of calculating your net worth. Your regular insurance premiums, plus any additional amounts owed to the policy due to loans or penalties are all regular expenses that have to be considered liabilities. Failure to pay your premium usually results in your policy being terminated, so this is not really a discretionary expense and should be viewed as a regular liability, such as your mortgage or car payment.

Another tricky investment vehicle usually related to insurance and insurance companies is the annuity. Annuities are retirement planning contracts that involve two distinct phases: the accumulation period and the annuitization phase. In the first part, the owner of the annuity invests money in the plan and in the second phase the money invested in – plus any additional amounts earned through its investment by the annuity administrators are paid out. There is a wide range of annuities available that operate on different terms, but for the purposes of calculating your net worth the main thing to consider is the surrender value if you are in the accumulation phase or the cash value if you are in the annuitization phase.

The surrender value is the amount that you can sell your annuity contract for before you begin receiving payments from the contract. In general your annuity provider should give you regular updates about the surrender value of your annuity and this should be added into your gross value calculation. If in the accumulation phase and you contribute regularly to the annuity (not always the case), then this expense should be added into your expenses.

If you are in the annuitization phase, then you should not be paying into the annuity any longer and you should have a fairly solid cash value for the contract. However, it is important to note that annuities are tax-deferred, which means you should be paying taxes on your payouts and this may significantly change your overall tax liability.