Is Life Insurance Protected in Bankruptcy?
There are two primary types of life insurance: term life and whole life. There are many ways these can be structured, e.g. as a universal policy, but for our purposes we will look at the simplified term life insurance and whole life insurance policies.
A term life insurance policy does not mature until someone’s death. As a result, when you file bankruptcy your term life insurance policy, or a policy that you are the beneficiary of, does not have any value until someone’s death. If there is no value there is nothing to protect in your bankruptcy. However, if you are paying premiums for a term life policy, the monthly premium should be listed in your budget.
A whole life insurance policy has a “cash surrender value”. This means after having the policy for a period of time, you can borrow against the proceeds. Those proceeds could then be used to pay your debts. Fortunately, as long as the whole life policy has your spouse and/or children as the beneficiaries and you are using North Carolina exemptions, it is protected under the North Carolina Constitution and the North Carolina General Statutes. The North Carolina Constitution states that life insurance proceeds where the spouse and/or children are the beneficiary are protected from the claims of creditors. As a result, you should be able to fully protect your while life insurance policy when you file bankruptcy.
If you are the beneficiary of a term life policy or a whole life policy and the person dies while you are in bankruptcy, those proceeds belong to your estate or the court. As an example, if your great uncle Billy dies and leaves you $100,000, the $100,000 life insurance proceeds would be payable to the bankruptcy trustee to pay your debts. If the life insurance proceeds pay all your debts in full, any remaining life insurance proceeds would be paid to you. Life insurance proceeds that you become entitled to within 180 days of the date the bankruptcy is filed with the court is also property of the estate. As a result, if uncle Billy dies two months after your bankruptcy is completed, but it is within the 180 days of the date you filed bankruptcy, those proceeds would become the property of the estate as well. Therefore, you should tell your bankruptcy attorney if you believe you may receive any life insurance proceeds during the six months after you file. As always, you should seek the advice of your bankruptcy attorney.
