Are assets in life insurance protected from creditors?

Life insurance is one of the most important investments you’ll ever make. It’s one of the few ways that you can guarantee your family has the money they need, even if something tragic were to happen to you. When you’re shopping around for coverage, there are several questions you may have about your insurance coverage. It’s essential you understand the protection that you’re providing your family and how they will be able to use the money if something tragic were to happen to you. This article is going to look at some of the questions you might have.

Are assets in life insurance protected from creditors?

It seems like a silly question — at first. If you have a pretty sizeable life insurance policy, one that will deliver say, $1 million or more in cash to your beneficiaries, you probably don’t have a lot of debt collectors calling you, right? So you aren’t all that worried about creditors someday trying to take the money you someday leave behind to your loved ones.

But you could have perfect credit and still see what you leave to your family, taken.

For instance, physicians worry about malpractice suits, and business owners, lawsuits, both for good reason. A recent New England Journal of Medicine study found that every year, one out of 14 doctors faces a malpractice suit. Earlier this year, Hiscox, the global specialist insurer, released a study of 1,023 American small business owners showing that 13 percent of them had been sued by an employee, vendor or customer.

And, sure, if you are someone with a ton of debt, and you often feel your back is against the wall, as you try to keep the debt collectors and creditors at bay, you, too, could be in danger. If you leave behind a life insurance policy to your family, some creditors could, in theory, come collecting.

There’s also the unexpected and unimaginable nightmare scenario. Perhaps your teenage driver is at the wheel, and you’re in the passenger seat. He or she makes a careless wrong turn, and suddenly you’re on an escalator leading up to some clouds and the Pearly Gates (this scenario is dark enough — let’s go with the cartoon version of death).

Meanwhile, below, your teen survived, and your life insurance policy payout looks like it’s going to keep your spouse and kids afloat. Yay!

Except that your teenage driver crashed into another car, and the driver of that car is ticked off — and taking your teenage driver to court, in order to collect damages, including the cash from your life insurance policy. Yaaaay-what?

So could this happen? Can creditors take the life insurance money you leave your family or friends?

Yes, no and maybe.

As is often the case with these scenarios, it depends on what you do, how good of lawyers your creditors have, who the judge is — and it depends on the laws that govern insurance in your particular state.

So if you are worried, generally, there are two steps that people often take.

Buy Umbrella Insurance

This is a form of insurance that gives you extra lawsuit coverage of $1 million or more. If you’re sued, your umbrella insurance offers money for defense costs — which can easily go into the tens and sometimes hundreds of thousands of dollars. So if you’re ever sued, umbrella insurance can help you mount a strong defense in court.

And should the darkest timeline win over and something happen to you — maybe you were texting and didn’t notice an open manhole cover — and then after your demise, your thriving medical practice, your business or your estate is sued, and your family’s cash value life insurance is in jeopardy, umbrella insurance will (to come back to our original point) give your family the legal protection they need to defend themselves in court.

Even better, umbrella insurance is relatively cheap. For the first million in coverage, umbrella insurance tends to cost around $150 to $200 per year. Then for every million more, expect it to go up another $100. And there are other benefits, too. If your family is ordered by a court to pay medical expenses for someone else, your umbrella insurance should cover that as well.

So, really, if you have a lot that your family can lose, whether a life insurance policy or other assets, you should look into buying umbrella insurance.

Of course, you might ask: I’m already protected from some of these liability scenarios through my homeowner’s insurance and car insurance, right?

Yes — but probably nowhere near the $1 million in coverage mark.

And you might also ask: And, Liran, what if my family fights in court and then loses in court? Could they then lose the cash I left for them through my life insurance policy?

Yes, maybe — though most states offer some protections to beneficiaries receiving a cash payout from a life insurance policy. But just to be extra safe, if you have a serious estate to protect, your financial adviser would almost certainly suggest to you that you…

Set Up A Trust

A trust is a legal entity that your attorney and you will create, in which you’ll authorize somebody to manage the property and your assets in the trust.

In this case, it would be an irrevocable asset protection trust. Just to warn you, these are expensive. Rates to set them up appear to be anywhere from $3,000 to $10,000 in attorney fees and expect to pay annual asset management fees of approximately one percent. But it’s presumably a drop in the bucket compared to not protecting your assets and someday having your family be on the receiving end of a lawsuit in which they lose everything you’ve worked for — or drains them of hundreds of thousands of dollars in legal fees.

Typically, it comes down to this. Oddly enough, the more invulnerable you feel, because you have a lot of assets, the more vulnerable you are to a lawsuit. And the more vulnerable you feel, because you have debt collectors calling, or you’re living paycheck to paycheck, the less likely you and especially your beneficiaries are to be sued.

You certainly could be, of course, but if you’re pulling a $37,000 yearly income and your house is underwater, creditors probably aren’t going to pay much attention to you, and probably and hopefully, in the event your family is targeted, your state would protect the life insurance payout, anyway.

But, fair or not, if your income statement makes a creditor think of the guy with the monocle on the Monopoly box, watch out.

Working with an Independent Insurance Agent

We know that shopping for life insurance can be a long and confusing process. There are over 800 insurance companies on the market, and all of them are going to offer you different rates based on their underwriting. The quotes you get for your life insurance could vary wildly depending on the company you contact. If you want to ensure you have the best plan to meet your life insurance needs, you need to contact dozens of companies before you decide which one is best for you.

That’s why we are here to help. Unlike a traditional insurance company, we are a group of independent insurance brokers. We don’t work with one single company, we represent dozens of highly rated companies across the nation and we can bring a personalized set of quotes directly to you.

There are a lot of different factors and technicalities you should be aware of when shopping for insurance. If you have any questions about life insurance or the coverage available to you, please contact one of our agents today. We would love to answer those questions and ensure you have the best possible plan for you and your family.

You never know what’s going to happen tomorrow, which means you shouldn’t wait another day to get the insurance protection your family deserves. If something tragic were to happen to you, and you didn’t have life insurance, your family would be stuck with a massive amount of debt and other bills. Not having life insurance coverage is one of the worst mistakes you could ever make for your family.

Call us today for a quote at 1-888-552-6159.

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Doug Mitchell

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