Court confirms creditor protection for life insurance

The Michigan Court of Appeals has issued a decision confirming that all elements of a life insurance policy, including the cash value of a whole life or universal life policy, are exempt from levy by a judgment creditor.

The plaintiff sued the defendant - for what is not disclosed - and recovered a judgment in the amount of $2.5 million. Plaintiff sought a writ of garnishment seeking to have the Prudential Insurance Company turn over the cash value of a policy that had been sold to the defendant. Defendant objected to the request.

MCL 500.2207 protects life insurance policies from claims of this nature by creditors. But the plaintiff argued that this section was intended to protect only the death benefit that is payable to the beneficiaries named by the insured, money that the insured himself does not own and can not reach while he is still alive. The cash value, the plaintiff argued, is fully available to the insured and can be taken out by him at any time, although this would reduce the total amount payable under the policy to the beneficiary after the insured is gone.

The Court of Appeals rejected that argument, ruling that the intent of the Legislature was to protect the entirety of the policy. One important point that it noted was that the cash value, if untouched during the insured's lifetime, will add to the recovery by the beneficiary. Conversely, allowing a creditor to attach the cash value would diminish the amount ultimately received by the beneficiary.

DC Mex Holdings v Affordable Land, LLC, decided July 25, 2017

Discouraging life settlements

Bill Boersma, at his niche blog On Life Insurance, comments on life settlements in life insurance contracts. This thoughtful piece brings up an issue for those who advise clients on personal planning issues. 

• Many people who have bought whole life or universal life policies years ago now find that it is difficult, as their financial condition has changed, to keep up with premium payments.
• They may find the need to make the hard decision to discontinue paying the premiums, and taking the current cash value of the policy. If they do so, however, they forfeit the death benefit under the policy, which will often be much higher than the cash value.
• They will often consult with the agent who sold them the policy about what their options may be.
• The agent may not tell them, and often is directly forbidden under his agency contract from informing them, that a life settlement is an option.

A life settlement (sometimes called a "viatical" settlement) is an agreement between an insurer and an insured to take an early buyout of the death benefit under the policy, in exchange for which the insurer receives a discount. This is often a very useful alternative for someone who has a terminal illness and pressing financial and medical needs as a result.

An example scenario: Jane Carter has a policy that she has held for the last 12 years, and for which she has paid nearly $250,000 in premiums over that time. The policy obligates the life insurer to pay a death benefit of $1 million to her three children. Unless the policy is paid up, where no further premium needs be paid, she still has to pay the annual premium of $16,500. This was feasible when she was working and earning $140,000 per year, but now she is retired and living on her social security and pension benefits.

Jane has been diagnosed with cancer and the prognosis is grave. She has perhaps 2-3 years to live. The medical expenses have been high, and she is strapped for cash. She does not think that she will be able to afford to pay the premium this year.

If approached, the life insurer may well be willing to negotiate an early life settlement, paying her perhaps $800,000 in satisfaction of her policy. This saves the company $200,000 off the death benefit and puts a significant sum of cash in Jane's hands. Both sides would see a significant gain as a result of such an agreement.

But if the agent she speaks with is not allowed to tell her about this option, she probably will not learn about it. The insurer would prefer that she default on the policy, take the cash value that has built up - maybe $100,000 or so - and go her own way. Her children, on her death, will receive only whatever is left of the cash value, if anything.

Boersma's piece notes a harsh reality: The agent represents the company, not the client, and his loyalties lie with the company. Someone who has a fiduciary responsibility to the client, such as an independent fee-based advisor or an attorney, has an obligation to advise her of the reasonable alternatives. The agent has no such responsibility.

The Simple Life Insurance Trust

For clients who have relatively limited assets, but who have a life insurance policy and wish to ensure that the proceeds will be held and managed by a trusted person (often a relative) while their children are young, we can prepare a simple trust document that will govern the use of the proceeds. Using this document, the trustee can be named as beneficiary of the policy, and can invest the proceeds for the benefit of the client’s children. The trust directs that income is paid to a child over a certain age (such as 18), and that the principal is paid to him or her at a specified age (30 or 35).

Life insurance on the young adult

Fox Business describes the strategy of purchasing life insurance if you have co-signed student loans for your college-age children.

Insurance and personal planning

Insurance coverage may not seem at first blush to have much to do with family succession planning, but succession planning starts with personal planning, and personal planning includes personal risk management, which makes extensive use of insurance.

Review your automobile insurance coverage

For liability coverage, make sure that you have coverage well above the minimum limits of $20,000 per person. Coverage of $100,000 per person is a minimum for anyone who owns more than $10,000 worth of assets. Coverage of $1 million per person is better for anyone who owns a business, real estate, or other more substantial assets. The marginal difference in premium between $100,000 and $1 million is usually a negligible amount.

Make sure you have uninsured (UM) and underinsured (UIM) coverage equal to the amount of your liability coverage. Liability insurance protects the world from your mistakes. Uninsured and underinsured coverage protects you from the mistakes of others when one of those mistakes is failure to properly insure a vehicle. You should protect yourself at least as well as you protect others.

UM and UIM are not mandatory under Michigan no-fault laws. Your insurer does not have to offer it, and you do not have to buy it. You have to pay a little more for it. The amount of the additional premium is not all that high.

Your insurer does not offer uninsured and underinsured coverage, or limits it to the $20,000 / $40,000? It has that right. You have the right to seek coverage from another carrier, one that will give you the level of protection you need.

Review your homeowners / renters insurance 

If you own your home, make sure that your casualty insurance is sufficient to cover the value of your home, outbuildings, and their contents. For particularly valuable individual items, such as jewelry or works of art, ask your agent about a special floater to cover them.

If you rent, renter's insurance is an excellent idea.

Both homeowners insurance and renter's insurance offer one of the best buys available: "floating" liability insurance. You are not only covered if someone is injured on the premises you own or rent. If you are sued based on something that you did anywhere else - at a baseball game, walking down the street - you will often be covered by this insurance as well.

Review your life insurance coverage 

For protection of a spouse and young children, life insurance equal to about 10 times your annual income is essential. If you are young and healthy, a term policy paying 15-20 times your annual income can be an excellent value.

Life insurance offering investment features may be worth consideration, but term insurance to ensure that those who depend upon you for their support will be supported is essential.

Make sure you have long-term disability insurance

The disability salesmen will remind you incessantly that the risk of disability is much higher than the risk of death for those in their 30s to 50s. They may sound like they are harping, but they are right. The proper long-term disability policy, purchased in your 30s and guaranteed renewable at the same level premium until age 65, will be an amazing bargain when you are in your 50s.