February 15, 2016
When filing a bankruptcy proceeding you are allowed to protect a certain amount of personal property. Bankruptcy attorneys refer to protected personal property as “allowed exemptions.” One of the categories of personal property is life insurance. Life insurance comes in many forms. However, for purposes of bankruptcy we typically categorize life insurance into term life insurance or whole life insurance.
Term life insurance has no cash value. It simply provides cash payment upon death. What this means is the policy or the insurance contract has no cash value while you are living. The term life insurance policy should be disclosed on your bankruptcy schedules, however, to the extent that it has no cash value a trustee has no ability to liquidate the asset. In other words, you may continue to pay the term life insurance policy and the beneficiaries are allowed to keep any of the proceeds despite your bankruptcy.
Keep in mind, any life insurance proceeds a debtor is entitled to must be disclosed to the trustee if received within 180 days from the bankruptcy petition filing date.
Whole life insurance is much different. Whole life insurance often contains a cash surrender value. This value is money that has accumulated in your policy which can be accessed by you or the bankruptcy trustee. In other words, at the time you file a bankruptcy petition if you have a whole life policy you will have to determine the cash surrender value. The good news is under the bankruptcy code 11USC §522 (d)(8) the debtor is allowed to retain $12,250.00 in un-matured life insurance contract proceeds owned by the debtor under which the debtor is insured or an individual of who the debtor is a dependent. To put it another way, if your cash surrender value is $12,250.00 you can retain those proceeds and you are not required to turn them over to the trustee. If the cash surrender value exceeds that amount you may still withhold the exempt amount $12,250.00 and turn over the balance of the amount the trustee. Additional exemptions may be available to protect your cash surrender value under the wild card exemption. Talk to your bankruptcy attorney.
Term life and whole life policies are not terribly complicated and can be dealt with appropriately in a Chapter 7 or Chapter 13 bankruptcy proceeding. It is important to be familiar with the type of policy you have, whether it is has a cash surrender value, and discuss the matter with your lawyer accordingly.