What Happens To Life Insurance During Bankruptcy?

April 4, 2012

Bankruptcy impacts all aspects of your finances. In many cases, the debtor’s assets will include an insurance policy. What happens to the policy will depend on a number of factors.

The first factor is whether the insurance is a term life or whole life policy. Since a term life insurance policy does not mature until death, the policy does not have a cash value. It is not an asset of the bankruptcy estate. Any monthly premium must be listed in your bankruptcy schedules and the bankruptcy trustee may object to excessive payments for term life insurance.

A whole life insurance policy has a cash surrender value and is therefore a personal asset. Protecting your whole life insurance policy is accomplished by using personal exemptions. While in some cases the entire amount of the cash surrender value can be protected, in other cases only a portion is exempt. Your attorney can advise you on whether your whole life insurance policy is at risk and how to protect it from your creditors and the bankruptcy trustee.

If you receive proceeds from a life insurance policy during your bankruptcy, those proceeds become part of your bankruptcy estate. In fact, the bankruptcy laws state that life insurance proceeds that you become entitled to within 180 days of the date your bankruptcy is filed is property of your bankruptcy estate and can be used to pay your creditors. This 180 day rule applies regardless whether you have already received a discharge and your case has closed. Consequently, it is important to discuss any expected life insurance proceeds with your attorney.

It is your attorney’s responsibility to protect life insurance assets. However, in order to protect this asset you must disclose the asset. Failure to inform the bankruptcy court of the asset could result in the denial or revocation of your discharge and the asset can be taken from you to pay your creditors. Don’t risk concealing assets! Tell your attorney about your life insurance and get the full benefit of the bankruptcy laws.

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