When you take out a life insurance policy and make regular payments, the insurer will grant your beneficiaries a death benefit when you pass. Although this is the goal, if financial difficulties arise and you file for bankruptcy, you could risk losing some or all of the benefits to your creditors.
There are two primary types of life insurance policy:
- Life term policies that don’t have a cash value. Instead, it pays a certain amount to your beneficiaries.
- Whole life insurance policies that accumulate cash value over time. You can borrow against it or cash it in if you need money quickly. These policies are more likely to be at risk if you file for bankruptcy.
Bankruptcy laws allow you to protect and keep property that you need for daily living, such as clothing, furniture, tools of the trade, and a reasonably-priced car. The value of a life insurance policy is not seen as an essential, but you can still protect it under state or federal exemptions. (New York allows you to choose between the two.)
The federal bankruptcy exemptions let you protect up to $13,400 in loan value, interest, or accrued dividends. If your policy is worth more, then the federal wildcard exemption lets you apply $1,325 plus $12,575 of any unused homestead exemption portion to protect any property you choose.
The New York State bankruptcy exemptions cover up to $1,150 of cash, bank account contents, or personal property if you don’t use the homestead exemption. Those who don’t use the homestead exemption can also exempt cash up to $5,700 or $11,375 minus any exemptions you take under the first ($1,150) wildcard exemption.
If you file for Chapter 7, then you don’t have to surrender the contents of the policy if you can manage to cover it with an exemption. If you file for Chapter 13, then any nonexempt value may have to be distributed among your creditors as part of your repayment plan. Your bankruptcy attorney will advise you on how the law applies in your particular case.
If you are the beneficiary of a life insurance policy and you file for Chapter 7, then a 180-day rule will apply. If you receive the money within 180 days of filing, then it will be included in your bankruptcy estate, and any non-exempt funds can be claimed by your trustee. If you don’t receive it until 180 days have passed since the filing, then the money is yours to keep.
Contact a New York bankruptcy attorney
If you have questions or concerns about how your life insurance policy will be handled in your bankruptcy, then address them with your attorney, who will advise you on the best way to protect it. Jayson Lutzky is a Bronx bankruptcy attorney with over 36 years of legal experience. He has helped many highly satisfied client regain their financial freedom. Call 718-329-9500 to learn more.