How can you make life insurance lawsuit-proof?

Life insurance may enjoy state statutory protection. But again, its protection depends on state laws. Click here to check your state.  If you own a large life insurance policy you may title your insurance policy to an irrevocable life insurance trust (ILIT). An ILIT is an irrevocable trust specifically designed to own life insurance. As with other trusts, the ILIT has a trustee, beneficiaries, and terms for distributions. Your ILIT would own your insurance policy and would be the policy beneficiary. When you die, your insurer pays the ILIT trustee who then distributes the proceeds to the ILIT beneficiaries. Your estate shouldn’t be the beneficiary, nor should you retain other incidence of ownership.

An ILIT can be unfunded or funded. With an unfunded ILIT, the life insurance premiums are not fully paid. Future premiums are paid to the trustee who then pays the premiums. With a funded ILIT you transfer to the trust either a fully paid insurance policy or enough income-producing assets to pay future premiums. Whether your ILIT is unfunded or funded, the policy premiums must be directly paid from the trust. If you directly pay the premiums you lose the trust’s tax benefits and creditor protection. Since the ILIT is irrevocable, it protects the policy’s cash value, death proceeds and trust distributions. If life insurance isn’t fully creditor protected under your state laws, then an ILIT is essential.

Click here to read more.