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Welcome to the next episode in the Asset Protection for Mere Mortals series.

And today we're going to discuss life insurance, specifically the exemptions for life insurance, because there is a good chance that some or all of the money that you may have in a life insurance policy can be protected from the claims of your creditors.

My focus in this series is to give you very actionable advice, to give you ideas that wouldn't necessarily require you to go and consult an attorney, to give you things that you can do even if

you don't have a half a million dollars yet or a million dollars yet, but yet things that will be very helpful for you to have in place.

That's why I titled this series mere mortals.

I do not claim that some of the techniques that we're discussing are perhaps the most bulletproof technique.

It's rather obvious that if you want the very best asset protection planning in the world, you're going to have an offshore asset protection trust.

You're going to have that in a very strong jurisdiction.

You're going to have an investment manager.

You're going to have all kinds of veto powers and rights of assignment.

You're going to have all kinds of things squared away.

And that'll also cost you $10, 000 or $15, 000 or $20, 000 a year just to maintain the legal structure alone, let alone the other fees that are associated with it.

And yet that's not advisable for somebody with a mere $50, 000 or $100, 000 in net worth.

You need to have significant assets before those types of strategies really become worth the money.

And so I'm focusing on mere mortals in this series.

I'm focusing on the things that are low-hanging fruit that are available to everyone.

That's why we've talked about Homestead exemptions.

That's why we've talked about Retirement Plan exemptions and today, life insurance exemptions, because these 3 things put together are probably the easiest and simplest things for you to do now.

And they are some of the things that will be the most helpful for you to have in place as you expand your wealth to the point where an offshore trust may be more appropriate for you.

The first thing I need to point out to you is life insurance is a sticky subject to plan because it's very much dependent on your state law.

Life insurance is governed by the laws of each individual state in the same way that homestead exemptions are governed mostly in the laws of each individual state.

Now, in my discussions on Homestead Exemption, we focused a lot on the things that are federally applicable.

Then in the discussion on Retirement Plan Exemptions, we focused a lot on the things that were federally applicable.

But with life insurance, everything comes down to the state and each state has tricky laws, tricky different amounts that are applicable.

And so the things that I'll talk about may or may not be applicable in your state.

You will have to research that very carefully.

Now, I'm either fortunate from the perspective of a financial planner or unfortunate from the perspective of a broadcaster to live in the state of Florida because the state of Florida has very, very strong and liberal laws that apply to asset protection as it applies to life insurance.

In short, in the state of Florida, as long as a policy does not benefit the insured, as long as the insured is not also simultaneously listed as the beneficiary of a life insurance policy, There is an unlimited amount of money that can be protected from the claims of a creditor within a life insurance contract.

And so it's a wonderful state to live in from the perspective of life insurance.

And when I sold life insurance in the state of Florida, that was certainly something that I would love to educate clients on, but it may not be the same in your state because some states don't exempt any amount of money in a life insurance contract.

Some states only exempt money that in the life insurance contract if certain requirements are met.

So certain requirements about a beneficiary, Some states require certain language to be involved in the actual policy, that you have to have certain language in the contract.

And so if your contract doesn't include that language, then you have trouble.

Some states talk about whether life insurance proceeds from a death benefit are protected or not protected.

Some states talk about cash values and so you will have to look at your state.

This is 1 of those areas where working with a competent life insurance agent, An educated life insurance agent should help you.

A life insurance agent who sells life insurance policies in your state should know those rules.

Or, and or, you need to also do some web searches and you also need to consult with appropriate legal counsel.

A bankruptcy attorney would be a good place to start.

The easiest way for you to get information on your state is to search for the bankruptcy exemptions.

As I've stated previously in this series, the best thing to do, if you are interested in what's protected in your state, pull up your computer, go to duckduckgo.com and just search something like Florida bankruptcy exemptions or Alabama bankruptcy exemptions.

And you'll start to see in the bankruptcy exemptions, those exemptions that will basically apply to most asset protection planning as well.

So I will proceed from here on the understanding that you know the laws in your

state Because this depending on your state life insurance may be very useful or it may be just

a waste of time and you need to move on the first thing I need to point out is, like other forms of exemptions, life insurance is not completely invulnerable.

There are creditors who can invade a life insurance policy.

The IRS can and will take the cash value of a life insurance policy or the proceeds under various circumstances.

So although you'll be protected from other forms of creditors, you will not be protected from the IRS.

But from most of the creditors that we're talking with, if you want to do the IRS, we're going to do quite a bit more sophisticated planning.

But for most people, most creditors will be protected with a life insurance policy.

Unique thing about life insurance is when I use that term, there are a couple of different ways that money comes out of a life insurance contract.

The first way that money can come out of a life insurance contract is in the form of a death benefit.

Somebody dies and a death benefit is paid.

Another way that life insurance can come out of a contract is in the form of some version of a living benefit, such as a distribution of cash value or a loan on cash surrender value, or basically dealing with what happens with the cash surrender value of a contract that it has a cash surrender value.

It's important that you understand that even if you have a term life insurance contract, that term life insurance contract can be a helpful part of your asset protection plan.

Let's assume for a moment that I have a million dollar term life insurance policy.

I don't have any kind of permanent contract I don't have anything that has cash surrender value.

I have a pure my insurance portfolio just has a term insurance policy and let's assume That I also have I'm deeply indebted.

And then I die and I leave that insurance contract with my wife as the beneficiary of the contract.

Great news is depending again on state law, even though I die and I leave that million dollars directly to my wife,

There's no other form of protection because it's a life insurance death benefit.

She may still be able to have that money protected from the rest of my or our creditors.

It's very important if you're ever the beneficiary of a death benefit on a life insurance contract, That, and if there's debt on the estate, or if there's any kind of antagonistic situation, including things like, divorce, you, it's very important that you obtain professional counsel, that you obtain legal counsel for your situation, The best thing to do, leave it with the insurance company.

Do not immediately file the death claim, get the check, toss that into your joint checking account.

If you do that, it may lose its protected status.

The safest thing is leave the death benefit with the insurance company.

Now, if you don't want to leave the death benefit with the insurance company, put it into a new separate account that is not co-mingled with your other funds.

If you're the beneficiary and you immediately take the money from a life insurance payout and you toss it into your checking account, it's now your asset.

It's now available to the claims of your creditors.

It's up to you if you want to use the money to pay your creditors, but don't do it right away without getting good legal counsel.

The reason I say the safest thing to do is to leave it with the insurance company is that will retain your maximum payout options.

Now you might take a an immediate full death benefit you might choose that.

You might choose to do something else though you might choose to take out an annuity payment and If you're in a situation where you're in a contentious fight with somebody, a creditor, you don't want to all of a sudden lose those options.

Example, 1 of the most valuable asset protection tools that you have is when you can transform an asset into something that would be very attractive to a creditor, into something that would not be very attractive to a creditor.

Now, some creditors would like to have annuity payment, but even if you live in a state that doesn't have great laws, if you can leave the assets, leave the life insurance payout with the insurance company until you're ready for it, or just take the annuity payment from the insurance company, you can transform something that's all available to a creditor all of a sudden to something that's an ongoing payout.

You got to look at your state laws, but leave it with the insurance company until you've gotten good legal counsel and good financial counsel.

Or if you do take it from the insurance company, do not commingle the asset.

Don't commingle it to where it becomes all of a sudden part of community property that is now subject to a divorce court.

So that is subject to the claims of your creditors.

Keep it in a separate account, a new account and get legal counsel on it.

I've seen this again and again and again, especially with small insurance payouts.

Let's say you're a 25-year-old kid and your dad has cancer.

And you're caring for your dad and you're helping him and as such you've totally messed up your finances.

You put yourself into debt and dad dies and has a $25, 000 life insurance policy.

Well, kid is desperate, just grabs the money, tosses it in the checking account, and 2 months later it's all gone and it goes to pay the creditors.

The money could be a starting point for you to reset your life, but you've got to maintain its protected status.

So life insurance has the unique context of having the beneficiary having protections for a beneficiary.

If you own a life insurance policy and you are going to have beneficiaries of that, You should make sure that you maximize the protection of those proceeds for your beneficiaries.

And probably to do that, depending on your state, probably you will want to establish a trust.

You will want to have a trust that has spendthrift protections so that the beneficiaries of that trust are protected, you'll want to make sure that you have a trust as the beneficiary of that asset.

This is so important, and so many people who don't have a lot of money yet aren't used to thinking like rich people.

But There's no reason for anybody to have less than a half a million or a million dollars of life insurance.

million dollars of life insurance, that automatically puts you in the situation of being rich.

Now all it takes is for you to simply sit down and draw up an appropriate trust, be the beneficiary of that policy, and you could protect millions of dollars for your family.

You know, most people listening to this, to this podcast, you should have at least a couple million bucks of insurance.

What would happen if you wind up in a long extended illness and you've got a bunch of medical bills, you've got, you've run up your credit cards, you've got debts all around, you've spent all your money and you're just barely hanging on and then you die.

Now think about the difference between leaving that asset directly to your spouse, if you live in a state that doesn't protect life insurance proceeds, leaving that directly to your spouse.

And now all of a sudden you thought you were well protected with a $3 million estate because you left it as a $3 million of life insurance, but now a million and a half bucks is gone and now your spouse is left trying to figure out how to put their life together with a million and a half dollars.

So spend the money and set up a trust that's the beneficiary of the contract and set up that trust with spendthrift provisions so it'll pay out an income to your spouse while they're dealing with settling the estate and getting rid of all your creditors.

Don't be stupid and own millions of dollars of life insurance and not understand how those beneficiaries are properly titled.

And here, the life insurance agent business does a very poor job of this.

Most life insurance agents simply want to sell policies because that's what gets a commission paid.

And most life insurance agents are not knowledgeable enough to properly advise somebody on the appropriate beneficiary designations.

And most people who buy life insurance don't have a clue what they're doing with the beneficiary designations.

The standard thing is, well, leave it to your spouse.

And so what happens is somebody, you know, they're feeling the pressure of buying a life insurance policy.

They don't know if they're getting ripped off.

And so they sit down and they're going to buy a policy and they don't know what to do when they're going through the application.

So they just put their spouse as the primary beneficiary, their kids as contingent beneficiaries, and they don't ever think to come back to it.

And what incentive does life insurance agent have to sit down and go over it, to do that?

They're going to sell the policy and they're going to get their commission.

And here's the problem, especially because people often have a weird relationship with life insurance agents.

They think that the only reason the life insurance agent is calling them is to sell them more contracts, which is certainly a big component of it.

They don't sit down and do the maintenance work.

When I was an, when I was a life insurance agent and a financial advisor, I would try to call all my clients at least once a year and try to do an annual review.

Now, obviously what was in it for me was to touch base with them, build a greater relationship, find out other needs, see what other policies I could sell to the situation.

Obviously, but there was a huge benefit for the client to take the meeting and go over and do a review.

And 1 of those most important things is updating beneficiary designations.

And here's the thing, you can update a beneficiary designation and you can do it when you're in the middle of a contentious situation and you're not going to have problems with the fraudulent transfer laws and such just by changing beneficiary designations.

So take the time and review the beneficiary designations.

Maybe I, who knows, but most people don't do it.

You got me yelling or I got myself yelling for, so forgive me.

It's just, this is, it's so stupid when you can control an incredible asset, you know, 2 million bucks of life insurance for 75 bucks a month.

That, that asset, if it's properly protected with the beneficiary designation can change the course of your family's future.

And when you're dying of cancer with a million dollars of creditors calling and you've got no money, that is such a valuable thing to do.

Now, at this point in time, I'm going to pivot from beneficiaries, which will satisfy all the buy term and invest the difference people.

And we're going to talk about cash value.

Because cash value life insurance contracts are some of, if your state protects them, are some of the most valuable wealth building tools that are protected from

They're absolutely wonderful from the perspective of asset protection.

of the value of your homestead from the claims of your creditors.

Florida law exempts 100% of the value of your retirement accounts from the claims of your creditors.

of the value of your life insurance policies

and annuity contracts from the claims of your creditors.

With those 3 tools alone and not a single dime in legal bills, although you should pay some to set up an appropriate trust to be beneficiaries of your retirement accounts and to be the beneficiary of your life insurance policies and to make sure that the, that your house goes into an appropriate trust, when it's part of your estate, but with the, without even legal, without that, we can cover most of the stuff that people face and do good asset protection.

And so cash value life insurance policies are wonderful because of their flexibility.

They're really, really incredible in terms of the power that they bring to a situation.

Now, if you're in a state that doesn't protect large amounts of life insurance, cash surrender values, then it's a very different story and you should either purchase an offshore policy if you want to go that way or you should do something else because that's 1 of the more benefit bigger benefits of cash value life insurance is that credit or protection.

Let me give you a few things to keep in mind when it comes to establishing life insurance contracts.

Again, check the laws in your state, but always remember this.

In a life insurance contract, There are 3 or 4 people who are involved in each contract, and these people can be different or they can be all the same.

The people are the insured, the person on whose life the policy is written, the owner of the contract, which is the person who has the legal rights to change the contract, the payer of the contract, the person who actually pays the premium, which is usually the owner but doesn't have to be, and the beneficiary of the contract.

And these 4 people can be all the same person.

You can own a policy that you bought and pay for on your own life.

And you can be the beneficiary of that policy.

the state of Florida, that would lose, you would lose your creditor protected status because you're the beneficiary of the contract.

Or you can own a contract on somebody else's life.

So I own life insurance contracts on the lives of my children.

I'm the owner, I'm the payer, and then I and or a trust can be the beneficiary of that contract.

And so you can use these contracts in very, very flexible ways.

There are very few assets that give you that

So if 1 spouse is healthy or unhealthy, doesn't mean you can't use life insurance.

If 1 spouse is older or younger, you can apply the life insurance contract appropriately.

You can adjust the beneficiary designations and you can change those beneficiary designations at any time.

So you get a tremendous level of flexibility.

Now, in a life insurance contract, you additionally have options with regard to how you fund it.

And over the last few decades, as there has been an explosion of different types of life insurance contracts, you have tremendous ways that they can be set up.

The traditional life insurance contract that has cash surrender values in it is a whole life insurance contract.

And a whole life insurance contract usually has the feature of requiring ongoing

You start it and let's say your premium payment is $3, 000 a year.

But many years ago, the universal life insurance contract was developed and 1 of

the benefits of a universal life insurance contract was the flexibility that came with the premiums and how the premiums are due.

So you can have a contract into which you pay regular premiums, you can have a contract into which you pay irregular premiums, and there are life insurance contracts that you can purchase which you even make a single premium.

Now, usually, for the purpose of tax planning, single premium life insurance contracts are not advisable because you lose the ability to take a loan against the policy without paying income taxes.

When you buy a single premium life insurance policy, you give up your ability to make that loan, which really hurts you from a tax perspective.

The rule is you generally wanna fund contracts

at least so they pass the 7 pay test, where you pay premiums for at least 7 years into them.

And so either you have to actually pay premiums or you have to pass the 7 pay test with regard to how you set the contract up.

So I don't want to get into the weeds any more than that, but a single premium life insurance contract still does retain its creditor protected status.

So if you had a million dollars and you were trying to move that million dollars from a from a non creditor protected status to a creditor protected status, you could do that through the purchase of a life insurance contract or an annuity contract.

And unlike retirement accounts where you're limited to a statutory maximum of say $60, 500 or $53, 000 or whatever your statutory maximum is, there is no maximum amount that can be put into a life insurance contract.

You can fund a $10 million single premium life insurance contract, and as long as you have the income and the assets where the insurance company is willing to take that risk on you personally, they'll be happy to take that check, and you'll have a very happy insurance agent who will sell you that contract.

So, you have incredible flexibility with putting money into it.

The second thing that has revolutionized life insurance industry is the use of different types of investment options in a life insurance contract.

Now here, I always have to be careful because I think most people are often would be better served with most normal people, most mere mortals would be better served with traditional life insurance contracts.

I get very nervous when unsophisticated people start purchasing universal life insurance instead of whole life insurance.

I get very nervous when unsophisticated people buy variable life insurance contracts instead of fixed life insurance contracts because there's tremendous value to a life insurance contract that stable that's boring and that's predictable.

Back during the 1980s, so many contracts blew up because you had unsophisticated people buying them with unrealistic promises and, you know, statements by the life insurance agents, and a lot of people got hurt, and it really put a big black mark on the insurance industry.

So I get very nervous when unsophisticated people buy universal life insurance, and when they buy variable life insurance.

But I have to concede that from the perspective of asset protection planning, you can use these contract types to give you a tremendous tool than to which you can put cash that is protected from the claims of creditors and has the benefits of a life insurance contract.

So the 2 things I'm focusing on, I first spoke about universal life insurance contracts as compared to whole life insurance contracts.

And the challenge is even those terms are no longer a bright line.

You can get whole life insurance contracts that have flexible funding options on them, even though they're not universal life insurance contracts.

But then the second thing has to do with what investments are held in the contract.

Traditionally, life insurance contracts, especially whole life insurance contracts, were part of an insurance company's general portfolio, their general account, the amount of money that the insurance company manages that is used to pay out to its own claims that it owes for insurance contracts.

And as such, they're very, very stable assets, but they don't have

They're largely invested in bonds, fixed income investments.

They're largely invested in perhaps a real estate portfolio, but they don't have much exposure to the, to the world of equities or risky investments.

Now there, you can also purchase a contract, however, that invests through what's called a separate account, through its own separate account.

And that separate account can be used to invest in various things that are like mutual funds.

They're not actually mutual funds, but they'll often be managed by the same mutual fund company.

And so you can purchase inside of life insurance company mutual funds that are invested in stocks.

the way, you can even build private placement life insurance contracts that have just

Like you can You can really use a life insurance wrapper to do some pretty cool things.

But I'm going to keep this for mere mortals.

So you can put yourself in a situation where if you're using a flexible, universal, variable universal life insurance contract, you can put yourself in a world where you own a policy that allows you to put flexible amounts of premiums into it, which can change year by year and you can own a policy that allows you to invest into mutual funds or the mutual fund equivalents that are held inside life insurance contracts, which gives you the potential for market returns, which might be, if everything goes right, might be higher than the company's general account.

Of course, that'll come with additional volatility.

It'll also come with the additional fees.

Now, most of the times the argument that goes against this type of financial move is in reverse.

And somebody will say, listen, first of all, it's hard to find index funds in life insurance contracts, although I bet you that's changing.

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609-Asset Protection Planning for Mere Mortals - Part 7 - Life Insurance Exemption Planning