We all want to ensure our family is provided for after we are gone. Sometimes, however, life takes an unexpected turn and at death we find ourselves owing much more than we expected. Circumstances like a catastrophic illness can decimate the assets you thought you would be leaving to your family. And creditors' claims can live on long after the money is gone.

There is a way to protect some assets from creditors and ensure that they get passed on to your heirs. Purchasing life insurance can accomplish that goal. That's because most state laws exempt life insurance from the claims of creditors. This is a significant difference between life insurance and other financial vehicles. Life insurance is exempt because its primary purpose is to meet the needs of both the insured and their beneficiaries.

The creditors of a policy owner cannot claim the death benefit to satisfy debts, and many states also protect the benefit from any creditor claims against beneficiaries. This enables beneficiaries to use death benefit proceeds in the manner they deem most appropriate.

When you are examining what kind of protections your state offers life insurance policyholders, you should investigate whether your state protects some or all of the policy's cash values during your lifetime. Laws vary from state to state and they are also open to judicial interpretation. That's why it is necessary to consult with an attorney who has expertise in this area about the protection offered in your state.

If you want to maximize your policy's protection, consider an Irrevocable Life Insurance Trust (ILIT). In simple language, an ILIT is a holding device. It owns your life insurance policy for you, which takes the policy out of your estate. Keep in mind that once you've created an ILIT and funded it with an insurance policy, you can't reclaim the policy in your own name. You can, however, exercise control over many other aspects of the ILIT, such as establishing who your beneficiaries will be and spelling out the terms under which they will receive benefits. You can also select the trustee who will manage your ILIT.

In addition to the advantages already enumerated, an ILIT can provide additional safeguards:

· Reduces the size of your estate, which in turn reduces your estate tax liability

· Protects the cash value of your life insurance policy from creditors

· Protects the benefits of a beneficiary who is receiving government aid

Even though an ILIT offers the best possible protection for your life insurance, it cannot protect it against some circumstance, such as transfers made to defraud creditors, divorce or child support. Once again, it is necessary to consult with an attorney to draft an effective ILIT based on your particular circumstances. When designed correctly, an ILIT is an effective tool for preventing creditors from reaping the benefits your family deserves.

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