As a Grand Rapids, Michigan estate planning and asset protection attorney I’ve been asked several times, “Is life insurance protected from my creditors?”  And sometimes it’s more specific, “is the cash value of life insurance protected from my creditors.”

Well, the answer is maybe yes, maybe no.  You see, there is a seeming incompatibility between the statutory law and the case law (court-based law) in Michigan.  In MCL 500.2207(1) it says that the proceeds of any life insurance policy payable to the wife, husband or children of the insured or to a trust for their benefit, including the cash value thereof, is exempt from claims of the insured’s creditors (read it by clicking here).

Seems to be pretty clear, right?  Wrong.  There are a couple of cases in Michigan where creditors were allowed to garnish the cash value of the insured’s (debtor’s) life insurance policy.  The cases are:

  • Chrysler First Business Credit Corporation v. Rotenberg v John Hancock Mutual Life Insurance Co., 789 F. Supp 870 (1992) – read it by clicking here.
  • Schenck Boncher & Prasher v. Vanderlaan, 2003 Mich. App. Lexis 2082 (2003) – read it by clicking here

Well that sort of muddies the water, doesn’t it?  And if you go back to MCL 500.2207(1) and read it in the context of 500.2207(2), you could read “cash value” to reference not the cash value during the insured’s lifetime, but rather only the cash value component of the proceeds after the insured’s death.

Here’s the kicker . . . there IS a way to fully protect life insurance cash value from creditors.  That is the topic of a future blog post, so make sure to check back regularly.

And if you (or your client/customer) can’t wait that long.  Call us at 616-827-7596 to schedule a Peace of Mind Planning Session to discover how to asset protect and tax-proof your life insurance and create a lasting legacy for generations to come.

Michael Lichterman is an estate planning and business planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™.  This goes beyond merely planning for finances – it’s about who your are and what’s important to you.  He focuses on estate and asset protection planning for  the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, family owned businesses and pet planning.  He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.