A client of mine asked me an interesting question over the weekend about the status of whole life insurance cash value as an asset. His question was whether it was protected from lawsuit judgments?

This question came because he had been approached by an agency that purported to represent large numbers of doctors from India. They highly recommended that all doctors have large amounts of whole life insurance as a way to protect at least some of their assets from possible malpractice suits. My initial take on this, that the cash value was a safe haven, was that it sounded like a good sales pitch but that with the huge variance in state laws it was doubtful that one size would fit all.

Let me tell you what really smells right up front on this. If the whole life insurance cash value is what is shielded from lawsuit garnishing, then to be significant in planning there would have to be large amounts of cash value stuffed away in the policy. Unless you can strategically plan on not being sued for 20 years or so, the only way to have significant cash value accumulation is to over fund the policy. In layman’s terms, pay way too much for your policy so the excess goes into the cash value.

I have feelers out to several advanced planning departments and independent attorneys on this question and hope to be able to pass on more than just my opinion this week. What I have found so far is that if this situation were in Colorado, which is a pretty typical state from an asset protection standpoint (according to Russ Lombardy with Clear Wind Law), up to $50,000 in whole life insurance cash value would be sheltered from attachment.

Bottom line. There’s probably only one thing that would make a whole life prone life insurance agent salivate more than just an average over priced sale. That would be talking someone into over funding a policy, thus driving the policy cost, and more importantly the commission on the sale, through the roof. More on this soon.

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