MKA Executive Planners Blog

Not too many people realize what a powerful asset protection vehicle life insurance is.  Most people do not understand that the investment inside a life insurance policy grows income tax free and may be accessed at any time with the condition only that the policy does not lapse.  In addition, the investment options (usually a wide variety of mutual funds) are extremely broad, and may be self-directed by the policy owner.  When we think of estate tax benefits we are usually trying to maximize the death benefits.  When we use life insurance as an asset protection strategy, the primary focus should be to maximum cash value accumulation.  This means the smallest death benefit possible so that the maximum investment return on cash value is achieved.

The Exemption from Creditors

Under Massachusetts Law:[1]

The entire cash surrender value of a life insurance policy is exempt from (the claims of creditors), if the beneficiary has an insurable interest in the insured and the beneficiary remains unchanged, since the policy was first issued.[2]

There is also a separate exemption that provides that the proceeds of any life insurance policy are exempt from any claims or creditors, if the policy is payable to or for the benefit of a female spouse, or to any person in trust for her or her benefit, and no court, and no trustee or assignee for the benefit of creditors, may require that the owner change the name of the beneficiary.  This latter section is not discussed in the memorandum, but it may be interpreted in accordance with some of the principles applicable to the much broader scope of Section 126.[3]

The Massachusetts Supreme Court, and two United States Bankruptcy Courts have interpreted the Section 125 exemption.  This was necessitated by the fact that the statute is somewhat vague as to whether the protection is during lifetime or only at death, and whether or not the exemption covers the cash value during the insured’s lifetime.  The statue has been interpreted to apply during the lifetime of the insured (as well as at death) and the exemption was broad enough to include the cash value policy.

The word “proceeds” as used in the statute, includes the cash value.[4]

The words “is effected” refers to the policy as was first issued, and therefore, if the beneficiary is changed after the policy is issued the exemption is lost.[5]

Insurance as an Asset Protection Strategy

If a person purchases a life insurance policy on his or her life (the “Insured”), names another person who has an insurable interest in the insured as beneficiary, and never changes the original named beneficiary, then the Insured may own the policy, and access the cash value at any time, while fully insulating the policy cash value and death benefit from any claims of the Insured’s creditors.[6]

If life insurance is to be used as an asset protection vehicle, the policy will be designed to maximize investment return (high cash value), and minimize death benefit.  A variable life insurance policy or a universal life insurance is used depending on the investment philosophy and investment risk tolerance of the policy owner.

Compared to other asset protection strategies, life insurance is unique.  There is no need for an asset protection trust, nor is it necessary to deal with conflict of law issues or other jurisdictional matters that might affect the exemption for Massachusetts’s residents.  The death benefit can be insulated from estate tax by having that paid to an irrevocable trust under a non-equity private split dollar arrangement.  This may be coupled with a turn-key receivables financing arrangement to enhance cash flow.

If you would like more information on this subject, or have a client who might benefit from a discussion about it, please contact Barry Koslow at bkoslow@mkaplanners.com or (781) 939-6050.

Securities offered through Advisory Group Equity Services, Ltd., Member FINRA/SIPC.  444 Washington Street, Woburn, MA 01801 (781) 933-6100. 

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