Can Your Cash Value Life Insurance Be Taken By Creditors?

By April 30, 2019 Whole Life Insurance

Can You Really Protect Your Assets With Cash Value Life Insurance?

The quick answer is yes but how much is truly covered…

If you are thinking about a cash value life insurance policy or already have one and have a need to understand the protection it can provide you are in the right place.

Most life insurance policies have features about them that are favorable to the owner, insured or beneficiary. In addition life insurance depending on the person and what state you may live in has other protection features such as protection from creditor and liability claims.

Your Cash Hiding In Plain Site?

Most of the cash and other assets that you will accumulate over a lifetime are at a potential risk but a permanent cash value life insurance policy can hide you money without the risk your other assets have.

Cash Value Life Insurance Advantages:

  • Cash value grows tax deferred
  • Access your cash values tax-free
  • Death benefit is tax-free
  • Death benefit can be estate tax-free
  • Guaranteed death benefit
  • Creditor and bankruptcy protection (State Specific
  •  

Don’t Buy Just Yet

It is important to have a good understanding of these potential benefits however do not buy a policy without seeking professional advice. We hear stories all the time of agents who are usually inexperienced and excited about the benefits of agent sold a policy to someone For some people, it’s not even available so care needs to be taken when approaching life insurance from this angle.

Each State is Different

Don’t just assume that your agent who is telling you that your cash value life insurance is a protected asset. For many states this is true but at varying levels. In the later part of this article you will see what states are more generous regarding creditor protection benefit than others. 

Some states like New York and Florida will protect 100% of your cash surrender values of a policy. States life California and many other offer little to no protection. Some states require specific beneficiary selections to get a benefit.

Cash Value Life Insurance is not your only option

If you are considering a product that provides you with asset protection cash value life insurance is not the only game in town. There are some other ways to obtain this kind of protection. One of these is an IRA that will provide you with similar protection. One item to note is that the IRA will not provide you with any leverage like the death benefit of a cash value policy does.

Death Benefit Proceeds

The proceeds from a life insurance policy called the death benefit are typically protected from creditor or liability claim. Life Insurance proceeds pass by contract and not through probate ensuring that the death benefit is received by your beneficiaries in full and tax free.

Alabama

Life Insurance Cash Value: Exempt from creditors of both the original owner and the insured (though not if the policy beneficiary is the same).

Life Insurance Proceeds: Exempt from creditors of both the original owner and the insured (though not if the beneficiary is the same). However, if the insured is the owner’s spouse, the interest of the owner is exempt. And, if the insured is the owner, the interest of a beneficiary spouse is exempt.

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Alaska

Life Insurance Cash Value: An unmatured policy is exempt up to $500,000.

Life Insurance Proceeds: Exempt from creditors up to $350 per week.

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Arizona

Life Insurance Cash Value: Exempt if the policy has been owned for a continuous two-year period and the beneficiary is a spouse, child, parent, sibling or another dependent family member.

Life Insurance Proceeds: Exempt if the beneficiary is a surviving spouse or child.

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Arkansas

Life Insurance Cash Value: Exempt from the creditors of the original owner and the insured.

Life Insurance Proceeds: Exempt from the creditors of both the original owner and the insured (though not if the beneficiary is the original owner or the insured).

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California

Life Insurance Cash Value: Loan value exempt up to $9,700 ($19,400 for married persons).

Life Insurance Proceeds: Exempt to the extent necessary to support the debtor, his or her spouse and dependents of the debtor.

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Colorado

Life Insurance Cash Value: Exempt up to $250,000 (except for an increase in value attributable to contributions made in the prior 48 months and not if the beneficiary is the estate of the insured).

Life Insurance Proceeds: Exempt from creditors of the insured (unless the beneficiary is the insured’s estate).

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Connecticut

Life Insurance Cash Value: Up to $4,000 exemption if the insured is the owner or person upon whom the owner is dependent.

Life Insurance Proceeds: Exempt from creditors of the insured (unless the beneficiary is the insured’s estate).

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Delaware

Life Insurance Proceeds: Exempt from creditors.

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District of Columbia

Life Insurance Proceeds: Exempt from creditors of both the original owner and the insured (though not if the policy beneficiary is the same).

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Florida

Life Insurance Cash Value: Exempt from both the creditors of the insured and the beneficiary.

Life Insurance Proceeds: Exempt from creditors of the insured (though not if the policy beneficiary is the same).

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Georgia

Life Insurance Cash Value: Exempt from creditors of the insured.

Life Insurance Proceeds: Exempt from creditors of the insured.

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Hawaii

Life Insurance Cash Value: Exempt from creditors of the insured/owner if the beneficiary is the insured’s spouse, child, parent or a dependent.

Life Insurance Proceeds: Exempt from creditors of the insured/owner if the beneficiary is the insured’s spouse, child, parent or a dependent.

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Idaho

Life Insurance Cash Value: Exempt (excluding accrued dividends, interest, loan value, and/or cash surrender value resulting from premiums paid within six months of filing bankruptcy or the date of attachment or levy)

Life Insurance Proceeds: Exempt from creditors of both the original owner and the insured (though not if the policy beneficiary is the same). Exempt from creditors of the beneficiary to the extent reasonably necessary to support the individual and his/her dependents if the beneficiary was the spouse or a dependent of the insured.

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Illinois

Life Insurance Cash Value: Exempt from creditors of the insured if the beneficiary is a spouse, child, parent or other dependent.

Life Insurance Proceeds: Exempt from creditors of the insured if the beneficiary is a spouse, child, parent or other dependent. Exempt from creditors of the beneficiary to the extent necessary for support of beneficiary and dependents.

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Indiana

Life Insurance Cash Value: Premiums paid toward a policy that names a spouse, child or dependent relative are exempt unless the premiums are paid less than a year prior to filing for bankruptcy.

Life Insurance Proceeds: Exempt from creditors of the insured or spouse of the insured if the beneficiary is the spouse, children or any dependent relative.

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Iowa

Life Insurance Cash Value: Exempt from creditors of the insured if the beneficiary is the spouse, child or dependent. The exemption is limited to $10,000 if such value is attributable to increases or contributions made within the prior two years.

Life Insurance Proceeds: Exempt from creditors of the insured if the beneficiary is the spouse, child or dependent of the insured. Exempt from creditors of the beneficiary for debts incurred prior to the death of the insured up to $15,000 if the beneficiary is a spouse, child or dependent.

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Kansas

Life Insurance Cash Value: Exempt from the creditors of the policyholder, insured and beneficiaries unless creditors establish claim within one year of issuance of the policy.

Life Insurance Proceeds: Exempt from the creditors of the policyholder, insured and beneficiaries unless creditors establish a claim within one year of issuance of the policy.

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Kentucky

Life Insurance Cash Value: Exempt from creditors of both the original owner and the insured.

Life Insurance Proceeds: The interest of the beneficiary is exempt from creditors of both the original owner and the insured (though not if the policy beneficiary is the original owner or the insured). Exempt from creditors of the beneficiary for debts incurred prior to the death of the insured/availability of the proceeds.

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Louisiana

Life Insurance Cash Value: Generally exempt. However, if the owner files for bankruptcy within nine (9) months of issuance, a maximum of $35,000 is exempt.

Life Insurance Proceeds: The interest of the beneficiary (including the estate of the insured) is exempt from creditors of the original owner and the insured. Exempt from creditors of the beneficiary for debts incurred prior to the death of the insured/availability of the proceeds.

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Maine

Life Insurance Cash Value: $4,000 maximum accrued dividend or interest or loan or cash value is exempt provided the insured is the debtor or individual upon whom the debtor is dependent.

Life Insurance Proceeds: The interest of the beneficiary is exempt from creditors of both the original owner and the insured (though not if the policy beneficiary is the original owner or the insured). A beneficiary’s interest in payment under policy insuring an individual of whom the beneficiary was a dependent is exempt from creditors to extent necessary for support of the beneficiary and dependents.

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Maryland

Life Insurance Cash Value: Exempt from creditors of the insured if the beneficiary is the insured’s spouse, child, parent or other dependent relative.

Life Insurance Proceeds: Exempt from creditors of the insured if the beneficiary is the insured’s spouse, child, parent or other dependent relative.

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Massachusetts

Life Insurance Proceeds: Exempt from the creditors of the original owner if the beneficiary is someone other than the person who effected the policy. Exempt from the creditors of the beneficiary if the beneficiary is the wife of the insured.

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Michigan

Life Insurance Cash Value: Exempt from creditors of both the original owner and the insured (though not if the policy beneficiary is the same). Exempt from creditors of a husband if the policy owned by the husband names the surviving wife and/or children as beneficiaries. Exempt from creditors of a husband if the policy owned by the wife insures the husband. Exempt from the creditors of the beneficiary (though not if the insured is beneficiary) if so provided in the policy.

Life Insurance Proceeds: Exempt from creditors of both the original owner and the insured (though not if the policy beneficiary is the same). Exempt from creditors of a husband if the policy owned by the husband names the surviving wife and/or children as beneficiaries. Exempt from creditors of a husband if the policy owned by the wife insures the husband. Exempt from the creditors of the beneficiary (though not if the insured is beneficiary) if so provided in the policy.

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Minnesota

Life Insurance Cash Value: Up to $9,600 accrued dividend or interest or loan or cash value is exempt provided the insured is the debtor or individual upon whom the debtor is dependent.

Life Insurance Proceeds: Exempt from the creditors of the insured/original owner. Exempt up to $48,000 for proceeds payable to a surviving spouse or child (plus an additional $12,000 for each additional dependent of the surviving spouse or child).

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Mississippi

Life Insurance Cash Value: Exempt. However, there is an exemption limit of $50,000 if derived from premiums paid within the previous twelve months.

Life Insurance Proceeds: Exempt. Proceeds payable to the estate of the insured are exempt up to $50,000 from all but the debts attributable to the insured’s last illness and burial (minus any proceeds available to the beneficiaries under other life policies).

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Missouri

Life Insurance Cash Value: Exempt from owner’s creditors if the insured is the owner or the insured is an individual upon whom the owner is a dependent, provided that such exemption in bankruptcy proceeding is limited to $150,000. No bankruptcy exemption if the policy was purchased within one year of bankruptcy commencement.

Life Insurance Proceeds: Beneficiary’s interest in proceeds and avails are exempt.

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Montana

Life Insurance Cash Value: Exempt.

Life Insurance Proceeds: Beneficiary’s interest in proceeds and avails are exempt from creditors of the insured or original owner (though not if the beneficiary is the insured or original owner).

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Nebraska

Life Insurance Cash Value: Exempt up to a value of $100,000 for all insurance policies and annuity contracts (though not including policies for which the estate is the beneficiary). However, any increase in cash value attributable to contributions, premiums or other payments made within the three previous years is not exempt.

Life Insurance Proceeds: Exempt up to a value of $100,000 for all insurance policies and annuity contracts (though not including policies for which the estate is the beneficiary). Plus, entirely exempt from the creditors of the beneficiary if there is a blood or marital relationship between the insured and the beneficiary.

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Nevada

Life Insurance Cash Value: Exempt from creditors.

Life Insurance Proceeds: Exempt from creditors.

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New Hampshire

Life Insurance Proceeds: Beneficiary’s interest exempt from creditors of the insured who purchases insurance on his or her life to benefit another person (unless the estate is the beneficiary). If the beneficiary is a married woman, her interest is exempt from her own creditors.

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New Jersey

Life Insurance Proceeds: Beneficiary’s interest exempt from creditors of the insured or original owner (unless the insured, original owner or estate of either individual is the beneficiary). Also exempt from creditors of the beneficiary for debts incurred prior to the availability of the proceeds.

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New Mexico

Life Insurance Cash Value: Entirely exempt.

Life Insurance Proceeds: Entirely exempt.

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New York

Life Insurance Cash Value: Exempt

Life Insurance Proceeds: Exempt from the creditors of both the original owner and the insured as long as the beneficiary is someone other than the owner/insured. Exempt from the creditors of an owner who insures the life of his/her spouse.

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North Carolina

Life Insurance Proceeds: Exempt from creditors of the insured or original owner (unless the beneficiary is the same).

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North Dakota

Life Insurance Cash Value: Up to $8,000 if the owner is the insured or someone on whom the debtor is a dependent is the insured.

Life Insurance Proceeds: Exempt from creditors of the insured. Exempt from creditors of the beneficiary if the beneficiary was a dependent of the insured to the extent reasonably necessary to support the debtor and any dependent.

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Ohio

Life Insurance Cash Value and Proceeds: Exempt from creditors of the insured if the beneficiary is a spouse, child or dependent.

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Oklahoma

Life Insurance Cash Value: Exempt.

Life Insurance Proceeds: Exempt.

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Oregon

Life Insurance Cash Value: Exempt from creditors of the insured or original owner (unless the beneficiary is the same).

Life Insurance Proceeds: Exempt from creditors of the insured or original owner (unless the beneficiary is the same).

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Pennsylvania

Life Insurance Proceeds: Exempt from creditors of the insured if the beneficiary is a spouse, child or dependent relative of the insured. Exempt from creditors of the beneficiary to the extent required to provide an income or return of $100 per month.

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Rhode Island

Life Insurance Cash Value: Exempt from creditors of the insured or original owner (unless the beneficiary is the same).

Life Insurance Proceeds: Exempt from creditors of the insured or original owner (unless the beneficiary is the same).

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South Carolina

Life Insurance Cash Value and Proceeds: The beneficiary interest of a spouse, child or dependent of the insured is exempt from creditors of the insured (as long as the beneficiary is not the insured’s estate). However, if the insured filed a petition in bankruptcy within two years of purchasing the insurance, the proceeds and cash surrender value are only exempt up to $4,875.

Unmatured Life Insurance Contract: Except for credit insurance policies, any dividend, interest or loan value is exempt up to $4,875.

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South Dakota

Life Insurance Cash Value: Exempt from creditors of both the insured and the beneficiary up to $10,000 if the beneficiary is the estate and the decedent is survived by a spouse or children. Exemption increases to $20,000 if the beneficiary is directly a spouse or child.

Life Insurance Proceeds: Exempt from creditors of both the insured and the beneficiary up to $10,000 if the beneficiary is the estate and the decedent is survived by a spouse or children. Exemption increases to $20,000 if the beneficiary is directly a spouse or child.

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Tennessee

Life Insurance Cash Value: Exempt from creditors of the insured if the beneficiary is a spouse or child.

Life Insurance Proceeds: Exempt from creditors of the insured if the beneficiary is a spouse, child or dependent of the insured (even if proceeds are payable to the insured’s estate).

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Texas

Life Insurance Cash Value: Entirely exempt.

Life Insurance Proceeds: Entirely exempt.

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Utah

Life Insurance Cash Value: Exempt excluding payments made on the contract within the prior year.

Life Insurance Proceeds: Proceeds from a policy that insures the spouse or child of the debtor are exempt if the policy has been owned by the debtor for a continuous unexpired period of one year. Proceeds from a policy that insures the debtor are exempt if the policy has been in existence for a continuous unexpired period of one year.

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Vermont

Life Insurance Cash Value: Beneficiary interest exempt from creditors of the insured or original owner.

Life Insurance Proceeds: Exempt from creditors of the insured or the owners. Also, the beneficiary’s interest is exempt from creditors of the beneficiary that exist at the time proceeds or avails are made available.

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Virginia

Life Insurance Cash Value: Exempt from creditors of insured, owner, purchaser or beneficiary (if beneficiary is the insured, the owner or the spouse, intended spouse or dependent of the insured or owner), unless policy was purchased within six months prior to bankruptcy filing.

Life Insurance Proceeds: Exempt from creditors of insured, owner, purchaser or beneficiary (if beneficiary is the insured, the owner or the spouse, intended spouse or dependent of the insured or owner), unless policy was purchased within six months prior to bankruptcy filing.

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Washington

Life Insurance Cash Value: Exempt from creditors of the insured or the original owner.

Life Insurance Proceeds: The interest of the beneficiary (not the insured or the original owner) is exempt from creditors of the insured or original owner. Also, proceeds are exempt from creditors of the beneficiary that exist at the time proceeds are made available.

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West Virginia

Life Insurance Cash Value: An unmatured life insurance policy owned by the debtor that insures the debtor or a person to whom the debtor is dependent is exempt up to $8,000.

Life Insurance Proceeds: The interest of the beneficiary (not the owner or insured) in the proceeds and avails is exempt from creditors of the owner or insured (exempt to the extent reasonably necessary for support of the beneficiary and his or her dependents if the beneficiary was a dependent of the insured on the date of death).

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Wisconsin

Life Insurance Cash Value: Value of a life policy that insures the debtor, his dependent or a person to whom the debtor is dependent is exempt up to $150,000 (but only up to $4,000 if the contract was issued less than 24 months prior). The exemption applies to the debtor’s aggregate interest for all life policies and annuities.

Life Insurance Proceeds: Exempt from creditors of the beneficiary to the extent reasonably necessary for support of the beneficiary and his or her dependents.

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Wyoming

Life Insurance Cash Value: The interest of the beneficiary (not the owner or insured) in the proceeds and avails are exempt from creditors of the owner or insured.

Life Insurance Proceeds: The interest of the beneficiary (not the owner or insured) in the proceeds and avails are exempt from creditors of the owner or insured.

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Legal Disclaimer

This article is for information purposes only. Do not take any of this information as legal advise. You should make sure to speak with a professional before taking any action. If there are any negative impacts from self implementation on what we discussed regarding cash value life insurance and asset protection we are sorry but we warned you. 

Recommended Reading

Participating Whole Life Insurance: Things to Know

Whole Life Insurance for Dummies

Tips for Comparing Whole Life Insurance

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