Asset Protection:Life Insurance and Annuities

Proper asset protection strategies are critical to a secure, well-protected future for you, your business, and your family.

Asset Protection is not just for the rich!

If you have some money and assets saved up, you need protection. How much depends on how big your bank account is. A competent lawyer, financial planner or accountant should be able to help you decide how far to go in building your asset protection plan.


Life insurance and annuities may be used for asset protection as well as estate planning. Both federal and state laws include some exemptions for the cash value or the proceeds of life insurance. As with other exemptions (like wages, homestead), the amount protected from creditors varies from state to state. In some states, such as Florida, annuities have especially strong protection.

There are two basic types of life insurance, term life, in which you pay only for a death benefit, and whole life, in which you pay additional money, which builds up as savings. Exemptions in most states protect at least some of the value of your policy from creditors’ claims. Upon your death, in most states, the proceeds can pass to your beneficiaries free of any claims of your creditors. In some states, property that is purchased with the proceeds of a life insurance policy is also exempt.

Additionally, even if a policy is originally exempt, the protection can be lost by:


Assigning your policy to a creditor. Note that often loan papers prepared by banks contain clauses that can give the bank a right to your life insurance policy. Read the fine print!


Buying a policy and paying the premium for it when you are insolvent. This would constitute a fraudulent conveyance and, if challenged, be found nonexempt.


Changing the beneficiary while you are insolvent.


If another person owns your insurance policy, your creditors cannot reach it because it is not your property. If you make a gift of your policy to your spouse or children, the gift must be absolute. You may not retain any control over the policy or you will lose the asset protection benefit.



Extra asset protection may be provided if you place your insurance policy in an irrevocable life insurance trust. With this type of trust, you transfer either an existing policy or the funds to buy one.



Annuities




Annuities offer another option for protection from creditors’ claims in some states. An annuity is an agreement whereby a person is to get a sum of money regularly over a period of years. There are fixed annuities where the amounts are determined in the beginning, and variable annuities where the amount to be paid out depends upon the return on investment. To set one up, you can pay a lump sum, or you can make periodic payments. They are useful in asset protection planning because they are exempt from claims in several states. The exemption ranges from a few hundred dollars in some states, to an unlimited amount in others. In some states, all annuities are exempt, while in others only annuities payable to one’s spouse, children or other dependents are exempt.



In some states, such as Florida, annuities have especially strong protection.


Annuities are currently enjoying great popularity.

There are dozens of varieties to choose from. Besides asset protection, another benefit available with annuities is the tax-free compounding of the investment, since the interest is not taxable until it is paid out. It is like an IRA but with no limit on the amount you can contribute.

See your financial adviser for more information.

The best plan is when you plan ahead!

Contact us for all questions you may have: anecamara@mintcofinancial.com

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