Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Monday, August 30, 2010

Using Life Insurance to Protect Assets

Ike devji Ike Z. Devji (attorney, Phoenix, AZ) co-authored an article entitled What is an alternative to my current cash position that will protect my money from litigation?, Worth Magazine (Oct.-Nov. 2009). The article, provided in full, is below:

In our current economic environment, many clients want their money safe and liquid. When most people consider “safe” and “liquid,” they immediately think of their bank. However, what most people do not know is that their checking or savings account is unprotected from a very real threat: the exposure to an increasingly hostile and predatory litigation system. Consider this: There are tens of thousands of lawsuits filed each day in this country. The average legal cost of defending a frivolous lawsuit is $91,000, plus the settlement amount itself. The number of lawsuits increases in tough economic times as people look to your wealth as an additional source of income.

Our team often takes commonly used tools and redesigns them to provide protection of client assets, while allowing clients to retain control and liquidity. The situations below demonstrate the benefits of a strategy we are using in which we take a universal life insurance policy and design it to provide 98 to 102 percent cash surrender value in the first year.

Current Situation—Cash in the Bank

A healthy 45-year-old male client has a bank checking account with $1 million. He rarely uses this account, but he keeps his money there because he likes to have a certain amount of funds liquid in case he needs to access it quickly. Here is how this account works:

  • The account earns about 1 percent interest per year, with income taxable as ordinary income.
  • If the client is sued for any reason and loses, the judge can order the transfer of the assets from the client’s checking account and into the plaintiff’s pockets. This may sound like an unlikely scenario, but we see it, and the threat of it, often.
  • If the client dies, the named beneficiaries will receive the $1 million minus the taxes due. 
  • If the client needs to use the money, he is able to take the amount needed.

Creditor-Protected Cash Alternative

The strategy our team has designed allows the same client to place the $1 million into a specially designed universal life insurance policy and insurance trust structure by paying a premium amount of $500,000 in each of the first two years. The policy will provide the following benefits:

  • The account will earn a net interest of about 1 percent annually invested in the policy’s fixed account, and the gains are allowed to grow tax-deferred.
  • If the client is sued for any reason and loses, the money in this account is 100 percent creditor-protected from day one.
  • If the client dies, the named beneficiaries will receive a death benefit of $10,624,682, the face amount associated with this specific example.
  • If the client needs to withdraw all or part of the money in the account, he is able to do so at any time with no fees or surrender charges, and he will have access to the money within a week.

Our strategy, needless to say, is a very powerful tool that keeps a client’s money liquid and safe.


Articles, Estate Planning - Generally | Permalink

TrackBack URL for this entry:


Listed below are links to weblogs that reference Using Life Insurance to Protect Assets:


I came across your recommendation while researching asset protection. You state that the named beneficiaries would receive the $10 mm death benefit. While true that the death benefit is paid to them due to beneficiary designation in the policy, the insured's estate will be liable for the federal estate tax on the death benefit amount to the extent that the insured had control over the policy.

Why not review the other options available for the purchase of life insurance that would keep the death benefit out the the estate, if in fact the insured wishes to increase his/her life insurance coverage?

Posted by: Max | Aug 31, 2010 9:19:24 AM

Post a comment