Life Insurance Policies in Bankruptcy

Life insurance policies must be disclosed in your bankruptcy filing. The two primary types of life insurance are term and whole life/universal life insurance.

Term life: Term life insurance does not mature until the policy holder’s death. Because it has no value until the holder dies, it has no value to add to the bankruptcy estate. The trustee will have no interest in your term life insurance policies. However, you are required to list any term life insurance policies you have on Schedule B with $0.00 value. You must also bring in a copy of your policy so the trustee can confirm that it is in deed a term life policy. Term life insurance is important in bankruptcy because the monthly premiums will be listed in your budget on the petition for means testing purposes.

Whole Life/Universal Life: Whole life insurance and universal life insurance have what is known as a “cash surrender value.” This means that these types of life insurance policies accumulate cash surrender values, which can be withdrawn or borrowed against. For debtors claiming the North Carolina exemptions in bankruptcy, whole life insurance can be exempted so long as the debtor’s spouse or child is the beneficiary. The child can be an adult and does not have to be a dependent. Whole life insurance premiums cannot be deducted from the means test.

If you are the beneficiary of someone else’s insurance policy and they die while you are in bankruptcy, or within 180 days of you filing bankruptcy, those proceeds will become part of your bankruptcy estate. The exception would be that group life insurance proceeds may enjoy protection pursuant under certain circumstances under North Carolina law.