Is the Cash Value of a Life Insurance Policy Free From Creditors?
Life insurance policies are insurance contracts that protect your family from your financial obligations after you die. The insurance policy acts like a trust document. You buy insurance on yourself or another individual, and the insurance company holds the money for you for the benefit of a third party called a "beneficiary." Because of this arrangement, many states have certain legal protections for the cash values of life insurance policies.
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Potential
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Many states have protections that limit or prevent creditors from attaching the cash values of life insurance to a judgment. This is largely due to the fact that life insurance represents a contract where the death benefit is being held for the purpose of providing for a third party -- the beneficiary -- who normally doesn't have a relationship with the creditor of the policyholder.
Significance
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The significance of these legal protections is that life insurance cash values stay intact. Since cash value insurance is dependent on the cash value account to stay in force, these protections help to ensure that the contract will not lapse due to a low or depleted cash value account.
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Benefits
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The benefit of the state protections is that you get to keep your life insurance policy. Some individuals and businesses take advantage of these protections to create large cash value policies that cannot be touched by their creditors.
Drawbacks
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Not all state protections are equal. For example, Florida offers strong protections for the cash values in a life insurance policy. It is virtually impossible for a creditor to attach any portion of the cash value savings to a judgment in Florida. Other states, such as Wisconsin, limit protections to $4,000.
Considerations
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Consider setting up a trust or separate holding company to protect the cash value of your policy from being attached to a judgment. This safeguards your life insurance policy from creditors if your state does not have strong protections for cash value life insurance.
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