What’s Asset Protection Insurance (“API™”)

While many are versed on home insurance, life insurance, car insurance and health insurance, few people know about the importance of Asset Protection Insurance (API). Asset Protection Insurance protects and safeguards assets from a variety of threats including litigation and creditor claims.  Individuals and business entities use asset protection techniques to limit creditors’ access to certain valuable assets, while operating within the bounds of debtor-creditor law.

API is a completely legal strategy.  However, experts warn effective asset protection begins before a claim or liability occurs, since it is usually too late to initiate any worthwhile protection after the fact. Some common methods for asset protection include asset protection trusts, accounts-receivable financing and family limited partnerships.

In addition to protection, Asset Protection insurance is meant to bridge the gap in coverage between your firm’s Professional Indemnity (PI) insurance policy and the total amount of a third party claim. It offers far wider and more flexible protection to the partners, members or directors than additional excess layer PI insurance on its own.

“It offers a ring-fenced financial reserve, which can be called upon to meet a number of potential costs and financial exposures if the PI insurance limit is insufficient to meet a devastating catastrophe claim,” says Perkins Slade an insurance company.

You may be asking yourself, “Well, Jeffrey Lipton what are the limitations to API?”

While API is broad and offers excellent protection, it is imperative to know how it works in order to benefit fully.  Firstly, creating an Asset Protection Strategy will offer little or no protection against those litigious or creditor situations whereby the event causing the problem happened prior to the setting up of the Strategy.

Only future-oriented protection can be achieved. 

Secondly, an iron clad Asset Protection Strategy will not offer enhanced taxation benefits and will likely be, at best, tax neutral in most cases. Although some benefits may accrue to future assets, they are best ensconced in a legal tax deferral scenario.

One of the most important aspects of a successful Asset Protection Strategy is to ensure that the structure itself is transparent. The most effective way to accomplish this besides asset protection is to insure that the assets pass irrevocably as they do in the case of API.  Under  an APIscenario assets legally change title and vest in a licensed, registered, and accountable fiduciary (i.e. the trustee) for the use of the beneficiaries.

By making the asset protection irrevocable and not a structure for tax purposes, all of the elements are declared and the client can then have the ability to use the law to in fact protect the asset. The API can then withstand the scrutiny and the test of time by being a program that accomplishes these goals for several generations to come.

Who needs API?  Any one who needs to protect themselves from economic predators, be they shareholders, clients, investors, friends or even family. An API strategy is imperative for businesses that carry the potential for litigation. These are the normal at risk businessman, professionals (i.e. doctors) and others who are either in a risk profession or have assets that need succession planning help.

A strong API strategy can protect assets and businesses that have been built over a lifetime and can give business owners and executives a deeper level of protection, thus resulting in peace of mind.