Life Insurance Policies in Bankruptcy
Filing for bankruptcy allows you to discharge debts while protecting certain assets. If you have life insurance, you may have questions about how bankruptcy affects the status of life insurance policies. North Carolina generally protects life insurance proceeds from creditors when the policy beneficiaries are the spouse or children of the debtor.
How Bankruptcy Impacts a Term Life Insurance Policy
Term life insurance policies provide benefits to the policyholder’s surviving family members for specified periods, usually 10 to 30 years. These policies typically have no value until someone dies.
In most cases, a term policy that you own and are the named insured will have no value. They are not subject to liquidation in bankruptcy.
If you have a term life insurance policy when you file for bankruptcy, the policy should stay active as long as you keep making your monthly payments. If you are making payments on a term life insurance policy, you should declare the payment as part of your expenses.
How Bankruptcy Impacts a Whole Life Insurance Policy
A whole life insurance policy offers coverage for your entire life as long as you pay premiums and includes a cash value component that increases with time. The policy should be listed as an asset when filing for bankruptcy.
North Carolina law N.C.G.S. 1C-1601(a)(6) shields life insurance proceeds from claims by creditors as long as the policy beneficiaries are the spouse or children of the policyholder.
If the beneficiary of the policy is not your spouse or children then a chapter 7 trustee may liquidate it just like any other asset. In Chapter 13 bankruptcy the policy would not be liquidated but its value may impact the amount of the repayment plan.
Do I Have to Include Life Insurance Proceeds in Bankruptcy?
Yes, it is important to disclose your life insurance policies and any proceeds you expect as a life insurance beneficiary, whether you file for Chapter 7 or Chapter 13. The treatment of life insurance proceeds depends on the timing of the payout and relevant exemption laws.
If you collect life insurance proceeds before filing for bankruptcy, they those funds would normally be part of your bankruptcy estate and could be used to pay creditors in Chapter 7. On the other hand, if you collect life insurance proceeds after you’ve filed for bankruptcy, you should consult a legal professional to understand how the rules apply to your specific situation.
How Does Bankruptcy Affect Life Insurance Eligibility and Premium Rates?
Bankruptcy can significantly affect your life insurance eligibility and premium rates. A bankruptcy filing will lower your credit score, making it harder to qualify for life insurance and increasing the cost of premiums. Insurers consider your credit score when determining eligibility and calculating premiums.
Contact Sasser Law Firm Today
Understanding the interplay between bankruptcy and life insurance can be challenging. Can creditors take life insurance proceeds? Can life insurance protect your dependents in bankruptcy? Get the answers you need from the board-certified bankruptcy specialists at Sasser Law Firm.
We have more than 20 years of experience helping clients work through a range of bankruptcy-related matters. Contact us today to schedule a free consultation and learn more.
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For more than 20 years, the Sasser Law Firm has been helping individuals and business owners sort through financial hardships to see the light at the end of the tunnel. Our North Carolina bankruptcy attorneys are all board-certified specialists, which means we have passed a complex exam, undergone a thorough peer review, and continue to earn legal education credits in this ever-evolving area of law.
