Can creditors go after your life insurance?

Submitted by carol on Wed, 08/13/2014 - 08:24

Life insurance policies are there to protect you in case you or any of your loved ones come across any misfortune. However, you might not know but life insurance can also come to your rescue in case your creditors come after you. In case your creditors sue you or you file for bankruptcy, your creditors might try to get hold of your life insurance policies. But can they go after you life insurance policy? Is that legal? Let us find out if your life insurance policy is protected from creditors and if any of these protections have limitations. Know the State Differences Whether or not a creditor can gulp down your life insurance policy absolutely depends upon your state’s regulations. While some states protect life insurance policies from creditors, some offer protection for a limited period of time. In the state of Florida, all cash value life insurance policies are protected as long as the insured is alive. However, after the death of the insured, the benefits become vulnerable and creditors are allowed to take their money before the benefits are passed on to the beneficiaries. While in Texas, both the cash value and death benefit are protected from creditors, except fraud instances. Cash Value of Life Insurance There are many types of life insurance policies. If it’s a cash value policy, such as whole-life insurance, your premiums get deposited into a cash account after subtracting insurance costs and other related expenses. These policies usually have minimum dividend return - usually 2-4 percent.You can withdraw cash at any time, however, you have to pay taxes for the same. One con of this type of policy is that if you fail to pay the yearly premium, the policy gets canceled. And at your death, the beneficiary receives only the value of the policy and not the amount of cash you pay in. In contrast to whole life insurance policies, term life policies are much cheaper since they last for a limited period of time. Considerations Under some circumstances a life insurance policy can become more vulnerable to the claims of creditors. If your name is listed as a beneficiary on someone else’s policy and he/she dies, the creditor can sue to use the life insurance payout in case you have co-signed any debts with the deceased. Again, if the policy names an estate as the beneficiary or the named beneficiary passes away, then the payoffs become absolutely vulnerable. The estate may need to liquidate its assets, including any life insurance to repay the creditors before any payment can be disbursed among any heirs. Irrevocable Trusts If you want a cash value policy but also want to avoid creditors’ consuming everything, you might consider creating an irrevocable trust for the betterment of your situation. Transferring your life insurance policy to such a trust might help since these trusts are exempt from creditors. Once transferred, you no longer have access to the funds and hence your creditors can’t compel you to use the policy to pay off your debts. All the wealth within an irrevocable trust are controlled by an independent trustee who determines how they will be distributed to the named beneficiaries.
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