When you put together a financial plan, one of the first steps is to calculate your total net worth. This lets you know your current financial position. In determining your net worth, you need to properly account for the value of your life insurance. The face amount of current life insurance policies does not count toward your net worth, but the cash value of policies and all inherited death benefits do count toward your net worth.
Your net worth is your current financial wealth. It is based on your household's balance sheet. Your balance sheet lists your total assets, everything you own, and your total liabilities, everything you owe. Typical assets are bank accounts, properties and investment accounts. Common liabilities are mortgages, credit card debt, and outstanding loans. To calculate your net worth, subtract your liabilities from your assets. Your total net worth increases as you pay off your debts and collect more assets.
When you buy a life insurance policy, you insure your life for a specific benefit, stated as the face amount. If you die, your beneficiaries receive this payment from the life insurance company. The life insurance is a contract to protect your heirs against the financial loss of your death. While you are alive, you have no access to the life insurance benefit, so this benefit is not considered an asset. Until a person dies, the face amount of a life insurance policy has no impact on the insured's net worth.
Certain life insurance policies build a reserve of cash that the insured can access before she dies. This cash value grows as the insured invests more money into the life insurance contract. Because you can access the cash value of a life insurance policy, this value counts toward your net worth. Your total cash value is listed as an asset on your balance sheet that increases your net worth.
When you are the beneficiary of a life insurance policy, you receive a lump-sum payment from the life insurance company after the insured dies. Your total net worth increases by the full amount of all received death benefits. The insurance company pays out the death benefit in cash, which immediately increases your liquid assets. The death benefit of a life insurance policy has no impact on your net worth while the insured is alive, but your net worth increases by the full death benefit once the insured dies.