Attorney at Law
Will I Lose My Life Insurance in Bankruptcy?
There are two types of life insurance policies, term life policies and whole life. Term life insurance policies are the kind that most people have because they are typically offered at little or no cost through one’s job and they can also be purchased
inexpensively on the private market. Term life insurance never gets seized in bankruptcy because it has no value unless the insured person actually dies. Even though they count as
“property” and have to be listed in your bankruptcy papers they are not worth anything and you don’t have to worry about losing them.
Whole life insurance is a different story. Whole life insurance works like an investment and accumulates cash value in the same way that a retirement account does, except unlike retirement accounts whole life insurance policies are not necessarily protected from seizure by creditors in a Chapter 7 bankruptcy. Whole life policies are protected in bankruptcy only when the beneficiary of those policies is your children. If you do not have children then there is generally no way to protect a whole life insurance policy. However, it is important to note that whole life insurance policies take several years to accumulate any significant cash value and even then may not
have any cash value if you have borrowed against them, which most whole life policies allow.
Seizure of whole life insurance policies is rare in bankruptcy but it does happen. If you have a whole life insurance policy with significant cash value you need to work closely with your attorney to see whether there is a way to protect it. You might be able to change the beneficiary of the policy to your children in order to protect it, but if that is not possible there may be no other way to protect it directly. In some cases if you know there is no way to protect whole life funds but you still need to file bankruptcy we might decide to have you cash out the policy, live off the funds until they are gone, and then file. Another option might be to file a Chapter 13 bankruptcy, which is a 3- to 5-year plan where you pay off a percentage of your debts with no risk of losing your property. In some cases, though, there may be nothing you can do about losing your whole life policy and you will just have to bite the bullet and lose it if you decide to file a Chapter 7 bankruptcy.