Co-Founder, Coastal Financial Partners Group, California
Yes, life insurance is one of a very few forms of property that is inherently protected from creditor claims. But in many states, the protection is limited in scope and/or by relatively small amounts. For example, in California, the protection limit is less than $10,000, while in Hawaii and Florida there isn't a limit.
Asset protection is a complex area so check with local tax and legal experts who can advise you.
Life insurance is personal property. Permanent life insurance generally has cash value. But it is one of the unique assets that are creditor proof for most states, i.e. not all. Consider the exposure of small business to the claims of creditors. Holding a cash value life insurance policy personally and not in the business could give access for liquidity, death benefit for beneficiaries and be creditor proof in most states.
Yes, creditors cannot touch the cash value of life insurance nor can they touch the death benefit as long as there is a named beneficiary and the money is not left to the estate. It is also protected from a divorce settlement and lawsuit. This is what makes whole life an attractive base to a good financial portfolio.
In many states life insurance is creditor protected by law, in some cases, including bankruptcy. Most states have specific guidelines and definitions as to how the policies are structured in terms of owners and beneficiaries, and the level of protection varies widely from state to state. By using these statutes, you and your attorney can characterize exposed cash assets subject to creditor risk to protected assets with a death benefit.
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Asset protection is a complex area so check with local tax and legal experts who can advise you.