Death Benefit

• Death benefits of life insurance policies may be excluded depending on the state. Some states provide significant protections, while others strictly limit protections. In Delaware, for example, the death benefit for all life insurance policies is wholly exempt from creditors. However, North Dakota exempts only $200,000 to the spouse, children and other dependents.
  
  

Cash Value

• The cash value of a policy pertains only to the equity value commonly found on permanent life insurance policies. This cash value is a savings and investment portion of a life insurance policy. Again, some states protect this amount, while others do not. Since the cash value is intimately tied to the death benefit, any reduction in the cash value negatively impacts the death benefit amount. This could, indirectly, affect the maximum death benefit left to your heirs. In Ohio, all proceeds and avails of the policy are exempt from creditors, provided that the beneficiary is a spouse, child or dependent. But in Colorado, only $50,000 of cash value is protected.
  
  

Effect

• Some states provide protections which appear to be contradictory. Colorado, as noted, provides $50,000 of cash value protection, but wholly excludes death benefits from creditors. However, a reduction of cash value reduces death benefits as a natural effect of withdrawing or borrowing against the cash value to satisfy debts. Therefore, a reduction of $10,000 from the cash value to pay debts results in a reduction of $10,000 from the death benefit of the policy, even though the death benefit in this state is deemed "wholly exempt."
  
  

Consideration

• Check your state laws. If your state has weak protections for life insurance, and you suspect you may be sued in the future due to unpredictable income or the nature of your business activities, consider transferring some or all of your policies to a spouse or someone you trust or a life insurance trust. Either of these actions will protect your policies from being taken from you in the event of a lawsuit. But, you must transfer the policy prior to any action being taken and it must not be done with the intent of defrauding your creditors.