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Is Life Insurance Protected from Creditors and Bankruptcy?

May 22, 2019
Our goal is to educate and advise on life insurance options, so you can feel confident in making the right choice, whether that’s through Quotacy or somewhere else. To ensure we provide accurate and trustworthy information, our writers follow strict editorial standards.

Is life insurance protected from creditors and bankruptcy? The U.S. government recognizes that life insurance is extremely important for family financial planning. Because of this, there are some laws in place that offer tax advantages for life insurance and some that protect certain policies from creditors and bankruptcy. 

When you file for bankruptcy, creditors are only interested in your current matured assets. Because a term life insurance policy does not mature until you die, there is nothing for the creditors to go after. When discussing bankruptcy, this article will be referring to the death benefits and cash values of permanent life insurance policies, such as whole life and universal life.

In non-bankruptcy situations, the laws of the state you live in will typically determine what happens if a creditor attempts to make a claim on life insurance policy proceeds. In general, a life insurance policy’s proceeds are exempt from the policyowner’s creditors unless the death benefit proceeds are paid to his or her estate. However, the proceeds are not automatically exempt from your policy’s beneficiary’s creditors, unless there are specific state protection laws in place. Continue reading to learn more.

Life Insurance Protection from Bankruptcy and Creditors

There are multiple people and entities involved in a life insurance policy. There’s the insurance company that pays out death benefits and other proceeds, there’s the owner of the policy, the person who is insured, and beneficiaries. And sometimes there are creditors who may attempt to make a claim on the policy’s cash value if the policyowner is a debtor.

If you’re in bankruptcy and own a life insurance policy and the insured is yourself, your spouse, or someone you’re financially dependent on, there are protection laws in place. When filing for bankruptcy, you can choose between either the federal or state law exemptions. The federal Bankruptcy Code protects the insurance element (face amount) of your unmatured life insurance policy, and up to a specified amount of interest (currently $12,625) in any accrued dividends, interest, or loan values.

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Note that some states do not allow you to choose the federal option and their specific state exemption is the only available choice. However, state exemptions are typically more advantageous for life insurance policyowners anyway. In addition to protecting the insurance element of a policy from bankruptcy, many state laws also protect the cash value and death benefit from creditors outside of a bankruptcy situation.

Each state has its own bankruptcy and non-bankruptcy exemption laws. Use this Non-Bankruptcy and Bankruptcy Life Insurance Exemptions by State document to find your individual state. These laws are current as of January 2019 and subject to change. The following summaries also may or may not include specific court decisions which may have deviated from the state’s law nor do they include different interpretations some courts have taken.

If you plan on filing for bankruptcy and are not quite sure how to protect your life insurance policies, it’s advisable to consult a professional or hire an attorney. Bankruptcy laws can be very confusing and a bankruptcy attorney’s sole job is to protect your assets to the best of their ability.

» Learn more: Can I Get Life Insurance if I’ve Filed for Bankruptcy?

This article is for general educational purposes only and is not legal advice.

7 Comments

  1. John Henrikson

    I live in Wisconsin and my wife and I filed joint bankruptcy December 19, 2019. My wife passed away June 12, 2020. I received a life insurance payout as her beneficiary. Do these proceeds go to repay creditors and trustee or is it exempt?

    Reply
    • Natasha Cornelius

      John, firstly I want to say I’m sorry to hear you recently lost your wife. In regards to your question, generally proceeds to a named beneficiary are exempt from the insured’s creditors. But that being said, they aren’t exempt from the beneficiary’s creditors. So it would depend upon the terms of the bankruptcy. I recommend that you consult with your attorney that worked with you and your wife on the bankruptcy.

      Reply
  2. Gee

    Hi I filed bankruptcy back in April my court date is in few days my dad died few days ago and I am beneficiary of life insurance through his job will it effect my life insurance miney

    Reply
    • Natasha Cornelius

      Gee, I am sorry to hear about your dad’s passing. Regarding your bankruptcy question, the answer will be depend upon when you’re actually eligible to receive the insurance proceeds and when you need to disclose your assets to the court as part of the bankruptcy proceedings.

      I spoke to our VP of Business Development who has more in-depth life insurance knowledge than I do. He does not believe there is any specific protection available that excludes your proceeds from your listed assets that are available to your creditors. That being said, if you are not able to receive them prior to your bankruptcy being finalized then he doesn’t believe your creditors will have access to the proceeds. However, we would really recommend that you visit with your attorney as the bankruptcy laws vary slightly from state to state. Your attorney will know what the statutory requirements are for disclosing assets in your specific state. Good luck!

      Reply
  3. Tom Lavelle

    “In general, a life insurance policy’s proceeds are exempt from the policyowner’s creditors unless the death benefit proceeds are paid to his or her estate.”

    Is this true?

    This website would seem to disagree:

    insuranceandestates.com/life-insurance-creditor-protection-by-state/

    Almost every state has a caveat.

    Reply
    • Natasha Cornelius

      Hi Tom, you are correct. Each state has different laws regarding non-bankruptcy and bankruptcy life insurance exemptions. We included the state-by-state document in this article so readers could learn the laws of their specific state.

      Reply
    • Jack Grimes

      Actually, the quoted statement is true as it is addressing the policyholder’s creditors (i.e., the insured’s creditors). Most state law exemptions are addressing the beneficiaries creditors. So, if Joe buys a policy on his own life and names his child Chucky as the beneficiary, Joe’s creditors can’t get the proceeds. Chucky’s creditors, however, can – depending on the extent of protection afforded by state law. In Florida, for example, Chucky gets no protection, whereas in other states it might be a set amount or a court-determined amount (based on fairness/equity).

      Reply

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