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How to Protect Your Life Insurance in Bankruptcy


life insurance policy

If you are filing for bankruptcy and either have a life insurance policy or are the beneficiary of one, there are several ways you can protect the value of the policy.

Is Your Policy Whole Life or Term Life?

A “term life” insurance policy does not accumulate cash value. Therefore, a term life policy is not considered an asset during bankruptcy proceedings, and the death benefit is not at risk whether you are a beneficiary or a policyholder.

A “whole life” policy may not be safe from creditors. Whole life policies accumulate cash value you can borrow, making your whole life policy a personal asset. If you hold a whole life policy, there are several ways you can protect its cash value. Continue reading and contact an experienced bankruptcy attorney in Philadelphia to understand your options.

Are You Filing Chapter 7 or Chapter 13 Bankruptcy?

The type of bankruptcy you file for will impact what happens to your whole life policy. In a Chapter 7 bankruptcy, a court-appointed trustee is permitted to liquidate any of your assets not “exempted” from your bankruptcy estate.

The proceeds from that liquidation are used to pay creditors. Any remaining debts are discharged or eliminated. Any cash value your whole life policy has accumulated is considered an asset and may be at risk. (Continue reading to learn about whether your whole life policy’s cash value may be covered by an exemption – the exemption allows you to keep the cash value of the policy.)

In a Chapter 13 bankruptcy, you won’t give up any of your assets, but you will enter a repayment plan lasting three (3) to five (5) years. This repayment plan factors in all of your assets, which may include the cash value of a whole life policy. However, there may be an exemption that will help you protect life insurance proceeds during Chapter 13.

Exemptions May Protect Your Life Insurance

Although the cash value of your whole life policy may be at risk when you file for bankruptcy, you may still be able to protect this asset with a state or federal “exemption” statute.

Federal law exempts:

  • Unmatured life insurance policies (except for credit insurance)
  • A life insurance policy with loan value up to $13,400
  • Disability, unemployment, or illness benefits
  • Life insurance payments for a person you depend on for financial support. (See 11 U.S.C. 522(d)(7)–(11).)

Some states allow you to choose between using the federal bankruptcy exemptions or your state’s exemption system (AK, AR, CT, DC, HI, KY, MA, MI, MN, NH, NJ, NM, NY, OR, PA, RI, TX, VT, WA, WI).

If you are unable to use a state or federal exemption, a wild card exemption may still be available. Wild card exemptions can be used to protect nonexempt assets in bankruptcy. The amount that is allowed under the wildcard benefit varies state-to-state.

These state, federal, and wild card exemptions apply not only to the cash value of your whole life policy, but also to any proceeds to which you may be entitled as the beneficiary of a life insurance policy. To understand what exemptions may be available to you as the insured or the beneficiary, contact trusted bankruptcy attorney David M. Offen, Esq.

Protecting Life Insurance Proceeds When You Are a Beneficiary Filing Bankruptcy

Bankruptcy Estates

When filing for bankruptcy, a bankruptcy estate is created with all property and assets included, as well as any property received within 180 days of filing. The value of the bankruptcy estate becomes the money used to repay creditors under Chapter 7 or helps to establish the payment plan you will follow under Chapter 13.

Generally, if a debtor becomes entitled to benefits more than 180 days after filing, these funds are excluded from your bankruptcy estate and are not at risk. However, if you become entitled to benefits within this 180-day window, you may still be able to protect these proceeds with an exemption.

For example, under federal law, you can exempt benefits you receive from an individual you were financially dependent on, if the funds are “reasonably necessary” to support you and any of your dependents. Many states also provide exemptions for death benefits. The law on this is nuanced and your bankruptcy attorney will help you should you find yourself in this situation, but as a general rule, the timing of receipt of life insurance proceeds is important.

When did you receive your benefits?

I Became a Life Insurance Beneficiary Before Filing Bankruptcy.

If you are a beneficiary and received funds before filing bankruptcy, these proceeds are treated as a cash asset and are vulnerable to creditors. In a Chapter 7 bankruptcy filing, these assets can be seized and used to pay creditors. In a Chapter 13 bankruptcy filing, these assets are considered when your payment plan is established. You may be able to use a state or federal exemption to protect these funds. The exemptions available to you are the same as those discussed above for whole life policy owners.

Death Occurred Before I Filed, but I Haven’t Received the Benefit.

If the death occurred before you filed for bankruptcy, but you have not yet received the benefits, any proceeds you become entitled to before filing become part of your bankruptcy estate. A beneficiary becomes entitled to death benefits on the day the insured dies. Therefore, the proceeds you will receive are considered an asset of your bankruptcy estate, and you need an exemption to protect these funds. These exemptions are the same as the type used to protect a whole life policy that you own.

I Became Entitled to Life Insurance Benefits within 180 Days of Filing.

If you recently filed for bankruptcy and are anticipating a death benefit, the insured’s date of death is an important date to keep in mind. If a loved one dies within 180 days after the date you filed, the insurance proceeds you receive are property of your estate. This is true even if your bankruptcy case is already closed. You must notify the court and discuss with your attorney what exemptions might apply to protect your life insurance proceeds. Again, if the death occurs after that 180-day window, your benefits are exempt because the proceeds were not part of your estate when you filed for bankruptcy.

About the author:

Chad G. Boonswang, Esq.

Mr. Boonswang is a life insurance beneficiary lawyer based in Philadelphia, PA, having graduated from the University of Pennsylvania and the Villanova University Charles Widger School of Law. Mr. Boonswang is a member of the Philadelphia Bar Association, the Pennsylvania Bar Association, the American Bar Association, and the Union League of Philadelphia. In 2003, Mr. Boonswang founded his own practice prosecuting life insurance claims and catastrophic injury cases, and his firm has since recovered tens of millions of dollars on behalf of his clients.

Mr. Boonswang maintains a popular and active blog on all aspects of life insurance law and policy.

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