Creditor Protection of Life Insurance

Is Life Insurance Protected from Creditors? Creditor Protection of Life Insurance

Want to shelter your assets from the prying eyes of the IRS, claims of creditors, or the public? Cash surrender value and life insurance proceeds are exempt from creditors in most states. In this episode, we’re talking about the privacy and creditor protection of life insurance.

So, if you want to know how to protect your wealth, from future risk of litigation, civil suits, bankruptcy, or even divorce … tune in below!

Where Creditor Protection of Life Insurance Fits In The Bigger Picture

Privatized Banking

Life Insurance is just one step in the greater Cash Flow System.

While it’s nestled into Stage 2, Protection, it also improves everything else around it.  Infinite Banking helps you keep more of the money you make in Stage 1, amplify your cash-flowing asset strategy in Stage 3, and accelerate your Time and Money Freedom.

Privacy and Protection Liability

Privacy and protection liability are never something you need until you actually need them. In other words, most of us operate as if “it won’t happen to us,” and when an event occurs, it’s too late to protect against.

For protection from creditors, and protection in bankruptcy, it it’s not the wealthiest who need protection the most. Although they’re the most likely to protect their wealth. The people who should be most interested in asset protection are those who have fewer assets and cannot afford to lose them.

Asset protection isn’t the most exciting topic, yet it is something that the wealthy think about. Success leaves clues–follow these clues that the wealthy leave and see how they grow and protect their assets. 

Liability Insurance and Auto

A Property and Casualty insurance agent once said people don’t think about liability until after the fact. So much so, that many people think that their auto insurance covers all liability. It doesn’t. So if your dog bites somebody at the park, and causes an injury that lands them in the hospital, those hospital bills can come back to you. If the bills are above your liability coverage, a creditor can take this debt and potentially use up your assets to cover it. 

Small or random incidents like this can happen, and they do happen all the time. Then, because we don’t think we need protection from them, we don’t have it in our times of need. It’s one thing to have an emergency or opportunity fund, it’s another thing to have a protected asset to act as this fund, that creditors cannot garnish or seize. 

The Privacy of a Life Insurance Policy

Life insurance is an incredibly private asset, meaning that no one can really see past that insurance barrier and know how much wealth you have. Privacy, especially around finance, is a significant concern in our society.

Privacy is a huge advantage of whole life insurance. You don’t need to report your life insurance policy’s earnings to the federal government. It’s so private, in fact, that you need not report it as an asset when applying for federal aid.

If your child is applying for college assistance through FAFSA, you don’t need to include your life insurance policies on the form. This can help your student receive better funding. Nor are you required to list it as an asset on loan applications, although sometimes it can help you secure better loans.

Creditor Protection of Life Insurance Cash Value

As a living asset, whole life insurance has tremendous benefits in the way of Privatized Banking. It’s a tool for legacy and estate planning, via the life insurance policy proceeds, which provides peace of mind. It won’t drop in value, it’s accessible to you, and it improves every other area of your financial life. We often focus on these aspects of life insurance, but we haven’t really addressed creditor and bankruptcy protection before. 

Life policies offer a private safety net that benefits society as a whole. By contract, the life insurance company is obligated to pay policy proceeds to the beneficiary. Because the life insurance proceeds are for the benefit of the beneficiary, life insurance offers protection under both federal and state law. This benefit to society is why these exemption laws exist.

Life insurance, like all insurance, transfers risk away from the policyholder. At the highest level, creditor and asset protection is about keeping your wealth safe from events that could cause loss. These events include:

  • lawsuits
  • divorce
  • bankruptcy
  • or overdue debts

When events like these occur, your assets can be garnished or attached to a claim. The protection varies widely, however, a certain amount of your cash value is exempt from creditors and bankruptcy.

Federal Law

Federal Bankruptcy Code protects the actual insurance element, the life insurance death benefit proceeds, and up to $13,400 of dividend, interest, or loan value in the life insurance policy. The government adjusts this value every three years, though it remains modest. Additionally, the debtor must be the owner of the policy.

In most cases, federal law will only apply to federal cases. Otherwise, you must comply with the regulations of your state. Though it’s important to note that some states will allow you to choose between the Federal Bankruptcy Code and the state code.

How Creditor Protection of Life Insurance Policies Varies by State

What states protect life insurance cash value from creditors?

There are wide variances in the state code regarding life insurance and creditor protection. In some states, they protect cash value from bankruptcy but not creditors. In other states, it’s protected from creditors but not bankruptcy. Some states have a limit to their protection, such as the first $10,000, while other states are much more generous.

Furthermore, state law often protects both cash value and life insurance death benefits in non-bankruptcy contexts. Otherwise, exemptions are often only extended to the beneficiaries of the debtor. In some states, the exemption only applies to the insured’s family members.

It’s important to check out your state’s specific laws about asset protection, which you can find here: Is Your Cash Value and Death Benefit Covered? Check out the interactive map for easy navigation.

When Life Insurance Exemptions Don’t Apply

Unfortunately, life insurance isn’t a viable solution for creditor exemptions in every instance. As we said earlier, it doesn’t work well if you’re already in hot water with a creditor. If you paid your premium to defraud a creditor, for example, the protection won’t apply.

You’ll find that you won’t have protection if you assign your policy to secure a debt, either.

Other Types of Asset Protection

Aside from life insurance, there are other ways of protecting your assets. One simple and affordable way to protect yourself is with umbrella insurance or liability insurance. You can add this to your homeowner’s or renter’s insurance and it’s very cheap. Most times, you can get up to $1 million in coverage for as little as $200-$300 a year.

Accidents happen, and if they happen on your property, someone can hold you liable. If someone slips and falls, and you have that coverage, you won’t be stuck footing their bill. 

This can also extend to other liabilities, like auto accidents. Auto and home liability insurance doesn’t cover everything, so it’s important to know your limits. Additional umbrella insurance can keep you from making a big payment for a mistake. And with this type of coverage, most liabilities will be settled.

For More Information on Protection From the Claims of Creditors

Asset protection is just one element of cash value life insurance, but it’s a big deal to have money that is private and secure from garnishment or seizure. We frequently discuss the power of keeping more of the money you make, and it doesn’t just apply to taxes. Keep control of as much of your wealth as possible, even in uncertain or difficult times. 

There’s no better time than the present to own life insurance before you’ve found yourself in a less-than-ideal situation. To learn more about ways to protect your assets from creditors and bankruptcy, read this Investopedia article

Organize Your Finances or Get Life Insurance Today

Do you want to use Privatized Banking, alternative investments, or cash flow strategies to coordinate your finances so that everything works together to improve your life today, accelerate time and money freedom, and leave the greatest legacy? We would love to help you.  

Book an Introductory Call with our team today

By the way, to find out more about how Privatized Banking gives you the most safety, liquidity, and growth  … plus gives you the ability to have your money do 2 things at the same time, boosting your investment returns. 

Go to to learn more.

Rachel Marshall

Rachel Marshall is the Co-Founder and Chief Financial Educator of The Money Advantage and President of Marshall's Insurance and Financial Services. She is known for making money simple, fun, and doable. Rachel has built a team of licensed professionals (investment advisors, insurance agents, attorneys, tax strategists) to help her clients create time and money freedom with cash flow strategies, Privatized Banking, and alternative investments. Rachel is the co-host of The Money Advantage podcast, the popular business and personal finance show. She teaches how to keep more of the money you make, protect it, and turn it into cash-flowing assets.
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