Life insurance as an asset protected cash alternative?
By Ike Devji
PRO ASSET PROTECTION
“What is an alternative to my current cash position that will protect my money from litigation?”
In our current economic environment, all clients want their money to be both safe and liquid.
When most people consider the terms “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. This is where the sciences of financial planning and asset protection meet. 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 percent to 102 percent cash surrender value in the first year.
Cash in the bank: A healthy 45-year-old male client has a bank checking account with a balance of $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 a regular, personally held bank 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 require the transfer of the assets from the client’s checking account into the plaintiff’s pockets.
- 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 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, free of any estate taxes.
- If the client needs to withdraw all or part of the money in the account, he is able to do so at anytime with no fees or surrender charges, and he will have access to the money within a week.
- Creditor protection
- Wealth multiplier effect of 10 times (in this illustration)
- Liquidity and borrowing options with no penalty
- Death benefit of $10 million plus that passes outside the estate and free of estate tax