Bankruptcy and Life Insurance

Life insurance is protected, unlike most other assets. Let’s compare – if I had a policy that had a $200,000 cash value in it, versus if I had $200,000 in a bank account in my name. Those two assets, depending upon the state that I live in, could be treated very differently. A creditor might be able to get to my bank account, but they might have a tough time getting to the cash value of my life insurance. In New York state the cash values of life insurance are fully protected against creditors (with the exception of the government such as the IRS, the State, Medicaid).

The reason I’m blogging on this particular situation today is a recent case in Iowa where a federal bankruptcy court ruled that exempt life insurance cash values, received during bankruptcy and used to pay down the mortgage of a debtor homestead, kept their character as an exempt asset. This family had some cash value in a life insurance policy and they took it out. They actually took it out of the policy and deposited into their bank account. Six days later they used it to pay down their mortgage.

After they filed for bankruptcy, they claimed their homestead as an exempt asset. The bankruptcy trustee objected and the case went to court. The trustee said that the cash values were no longer exempt because they had been taken out of the policy, put into a bank account and then used to pay down the mortgage to defraud the creditors.

Both personal life insurance cash values and homestead values are generally exempt in bankruptcy cases in the state of Iowa. However, the values of a bank account in excess of $1,000 are generally not exempt. In this case, the bankruptcy trustee’s position was that the bank account into which the insurance proceeds were deposited was a non-exempt asset and the subsequent transfer of the bank account to the homestead was improper. The family took exception. The bankruptcy trustee took exception and the bankruptcy court was asked to decide whether the $28,000 was exempt. The court ruled it was exempt.

This example further highlights the strength of having assets that are positioned in a way that protects you from creditors and bankruptcies. Life insurance cash values, in this context, are superior to other cash equivalents, because of the superior protection creditor feature it provides.

To learn more give us a call. We would be happy to discuss creditor protection and how it could help you.

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