Types

• There are two types of life insurance. Term life insurance provides basic death benefit protection in exchange for premium payments. Permanent life insurance provides death benefits and cash value savings associated with the policy.
  
  Term life insurance is excluded from lawsuits, since there is no cash that can be taken from the policy. Permanent life insurance policies, however, may be subject to liquidation for their cash surrender value, depending on the circumstances of the lawsuit and the beneficiaries.
  
  

Excluded, But Not If It Has Cash Value

• Life insurance is generally excluded from judgments. The death benefit belongs to the beneficiary, and the beneficiary doesn't owe the creditor any money. Because of this, death benefits are excluded from lawsuits.
  
  The exception to this is if the policy is a cash value policy. Under these circumstances, the life insurance policy may be used to satisfy the debt, if there is any cash surrender value associated with the policy. The only way to prevent the policy from being liquidated under this scenario is to have had the policy ownership transferred to an individual not involved in the lawsuit prior to any legal action being taken against you.
  
  

Being Sued

• Your beneficiaries are not disinherited if you get sued. This ensures financial security for your family, even if a lawsuit is brought against you. Most states require that your child or spouse be named the beneficiary on the policy for the policy to be exempt from any lawsuits in which you may be involved.
  
  

Disadvantage

• As a result, the primary disadvantage to life insurance comes mainly in cash value insurance. Some states don't protect the cash value of a permanent life insurance policy. If your state does not protect the cash value of the policy, a creditor may be able to collect from the policy. If this happens, it will reduce the life insurance death benefit amount by the amount that is removed from the cash value. If the cash value savings drops to zero, the policy will lapse and you'll lose your life insurance coverage.