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Term v. Whole Life Insurance in Bankruptcy

Many people who are considering filing for bankruptcy have life insurance policies and do not want to loose them by filing bankruptcy. However, your life insurance policy may not actually be considered a part of your bankruptcy estate or, if it is considered a part of your bankruptcy estate, there might be an exemption that will allow you to protect it. Whether your life insurance policy will be considered a part of your bankruptcy estate first depends on what type of life insurance policy you have. The second big consideration is who the beneficiary is on your life insurance policy. There are two main types of life insurance polices, Term Life Insurance and Whole Life Insurance, which we will discuss in turn.

Term Life Insurance:

Term Life insurance is life insurance that does not have any cash value while you are alive. Instead, upon your death it will provide proceeds to your designated beneficiary. In other words, it does not mature until your death. Thus, Term Life Insurance is not considered a part of your bankruptcy estate, because there is no “cash value” for your bankruptcy trustee to administer and provide to your creditors.

Whole Life Insurance:

Whole Life Insurance, on the other hand, DOES have a cash surrender value. This means that you can borrow against the policy after a certain amount of time has passed as specifically laid out in your policy. Therefore, it is considered a part of your bankruptcy estate because it can be cashed in and used to pay your debts. However, if the beneficiary is your spouse or a dependent child, it may not be considered a part of your bankruptcy estate. There is also a Federal Exemption that allows you to exempt or protect up to $12,250 of the cash surrender value.

Receiving Term Life or Whole Life Insurance Benefits while in bankruptcy.

If someone dies who has listed you as the beneficiary of their Term Life Insurance or Whole Life Insurance policy while you are in bankruptcy, then those proceeds could potentially be lost to your bankruptcy estate. In fact, if you receive any benefits from a life insurance policy within 180 days of filing for bankruptcy, the proceeds will be considered to be a part of your bankruptcy estate and used to pay your creditors. However, there are certain estate planning techniques that the policy holder can use to protect the proceeds in the event you are in bankruptcy when they die, so that the proceeds are not lost to your bankruptcy estate.

If you have a life insurance policy or are the beneficiary of someone else’s life insurance policy, it is a good idea to first consult with an experienced bankruptcy attorney in your area to find out the affect filing for bankruptcy may have on the policy. Finding out whether or not the life insurance will be a part of your bankruptcy estate prior to filing could save you from unexpectedly losing it. If you are in the Jacksonville, Florida or surrounding areas, contact the Law Office of David M. Goldman, PLLC today.

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