Insurance Cash Value or Surrender Value in Bankruptcy

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You need to know how your insurance cash value or surrender value policy effects your bankruptcy case.  The first thing you need to know is that life insurance fits in two categories:

  • Term Insurance
  • Whole Life Insurance

Term life insurance is exactly that.  You buy a contract of insurance for a specific term for a set price and with a specific death benefit.  This type of policy does not accrue dividends or grow a cash balance.  You cannot take a loan against it.  Most typically it is what your employer includes in your benefit package.

Whole life insurance grows cash value.  It is the kind that you can borrow money from.  Over time it accrues dividends.  It can also be called universal life.  Some people use it as an investment vehicle.

My new client questionnaire as well as Schedule B of the bankruptcy petition asks you to list your life insurance policies with the valuation of each.  Why is that important?  Let’s talk about valuation first.  If you have a term life insurance policy the value is always zero.  There is no cash value.  You can’t surrender it for money. Whole or Universal Life insurance has value.  It is the cash or “surrender” value minus any outstanding loans against the policy.  When you provide me the value of your insurance, I need to know the cash or surrender value of each policy.  Every client gives me the amount of the contract death benefit.  The amount paid at death is totally unimportant.

This cash value of your life insurance policy is a potential asset of which your chapter 7 bankruptcy trustee can liquidate for you creditors.   I say potential asset because it all is not created equal.  Some or all of it may be exempt under Ohio law.  The reason for the exemption depends on who is the beneficiary.  That means who gets the money if you die.  If the beneficiary is a spouse, child or other person dependent on you, the cash or surrender money is exempt and your creditors and your bankruptcy trustee cannot touch it.  There are some other uncommon exemptions for beneficiaries who are creditors, charities, or trustees for your spouse, children or other dependents.

Many times a client will have a parent as the beneficiary.   The insurance is burial money.  A parent is not a spouse (although they could be a dependent).   The cash or surrender balance is not exempt from your creditors.  Sometimes clients have insurance and there is no beneficiary.  That also results in the money going into the bankruptcy estate for the benefit of creditors.  That does not necessarily mean cashing in the policy.  You could keep the policy and borrow the non-exempt money and pay it to the bankruptcy trustee.

To make the proper decisions about exemption of life insurance cash value or surrender value in bankruptcy, I will need you to bring me the policy along with the latest statement from the company.

Creative Commons License photo credit: h.koppdelaney

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Bill Balena

Bill Balena is a Bankruptcy attorney with an office in Westlake, Ohio. I represent consumers in Chapter 7 and Chapter 13 cases. I am also an accomplished dui/ovi trial attorney.

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One Response to Insurance Cash Value or Surrender Value in Bankruptcy
  1. [...] a set period or number of years. In simplest terms it is the kind of life policy that does not have cash value. You can’t borrow against it.  When you list it on schedule B the value is always [...]

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