Will I Lose My Life Insurance Policy If I File for Bankruptcy?

With a life insurance policy, in return for your payments, your insurance company will provide your beneficiaries with a death benefit in the event of your passing.  As of 2013, about 62% of Americans report having a life insurance policy.  But what happens if you run into serious financial hardship?  If you file for Chapter 7 or Chapter 13 bankruptcy, will you lose your life insurance benefits to creditors?  Our Princeton bankruptcy lawyers explain.

Insurance Policy

Are Life Insurance Proceeds Exempt in Bankruptcy?

Bankruptcy divides debtors’ assets and possessions into two broad categories: those which are exempt, and those which are non-exempt.  Exempt items enjoy partial to full protection from creditors, with the extent of protection depending on where you are located and which set of exemptions you elect to use.  In contrast, non-exempt items are not exempt from the bankruptcy estate, and therefore may be pursued by creditors to help satisfy your debt obligations.

As mentioned above, exemptions can vary dramatically depending on where you live.  Some exemptions which exist in one state do not even exist in other states.  New Jersey and Pennsylvania debtors may choose between using the exemptions which correspond to their state, and the nationwide federal exemptions.  (However, you must remember that you have to stick with the exemption system you elect to follow: you cannot simply pick and choose the most favorable exemptions from different systems.)

The current life insurance bankruptcy exemptions are as follows:

  • Pennsylvania — Proceeds from life insurance may be exempted if the beneficiary is the decedent’s child, spouse, or a dependent relative.
  • New Jersey — Proceeds from life insurance are exempt if the policy expressly prohibits proceeds from being used to satisfy the beneficiary’s creditors.  Additionally, proceeds which go toward individuals other than the insured person are exempt from the creditors of both the beneficiary and the insured person.  You can also exempt proceeds related to disability provisions in your policy.
  • Federal — Life insurance proceeds can be exempted if they have not matured, with the exception of credit life insurance (i.e. a policy which is meant to pay the borrower’s debts in the event of death). Furthermore, under the federal personal property exemptions, you can exempt up to $12,250 in the loan value of your policy.

It’s also important to talk about the 180-day rule which applies to Chapter 7 bankruptcy cases.  If you inherit life insurance within 180 days of filing for bankruptcy, that inheritance will be folded into the bankruptcy estate, and anything which is non-exempt may be vulnerable to the trustee and your creditors.  However, if you do not inherit insurance until after 180 days have already passed from the time of your filing, the insurance proceeds will not be added to the bankruptcy estate.

Bankruptcy

You Must List Your Assets — Even if They’re Exempt

Whether you have a term life policy or a whole life policy is another important point of consideration. When you file for bankruptcy, you have to list all of your assets.  In fact, if you are caught attempting to conceal assets in an attempt to hide them from your creditors, your case may be dismissed — not to mention the fact that you could find yourself being charged with fraud.

Despite the aforementioned life insurance exemptions, if you fail to list the CSV (Cash Surrender Value) of your whole life policy, it may be taken and distributed by the trustee assigned to handle your case.  While term life policies do not have a CSV like whole life policies, proceeds could also be claimed by the trustee if you were to pass away after the completion of your bankruptcy case and you failed to list your policy.

The bottom line is that, even if you are confident the proceeds of your policy would be exempt from the bankruptcy estate, your assets must still be properly disclosed and documented — or else you risk losing more than you have to.  When the time comes to list your assets, insurance should be documented on “Schedule B,” which is used for personal property.  In the “Type of Property” column, you will see insurance noted at entry number nine (“Interests in insurance policies”).  Filers are instructed to “Name insurance company of each policy and itemize surrender or refund value of each.”

Pennsylvania Bankruptcy Lawyers Offering Free Consultations

The relationship between insurance and bankruptcy is very complex, and filling out bankruptcy schedules correctly can be difficult, so it’s important to talk about your questions and concerns with experienced legal representation.  To set up a free and confidential case evaluation with our bankruptcy attorneys, call Young, Marr & Associates at (609) 755-3115 in New Jersey or (215) 701-6519 in Pennsylvania today.

Have You:

Been paying credit card balances that seem to never go down?

Lost your job and are now having trouble keeping up?

Attempted to work out a payment arrangement to no avail?

Been notified of a mortgage foreclosure action?

Been denied for a mortgage or other line of credit?

If the answer to any of these questions is “yes” then bankruptcy may be an option that you should consider.

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