L is for Life Insurance

L is for Life InsuranceLife insurance enjoys special treatment in bankruptcy. To begin, there are two basic types:

    1. Term life, and
    2. Whole life

Term Life Insurance

This type of life insurance I what most people have. It is the kind that if your employer will often provide as a benefit. Typically it has a far lower premium than it’s counterpart. The contract with the insurance company is often for 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 $0.00.

Term life insurance is smiled upon by the gods in Congress. For means test purposes the amount you spend for term life is a dollar for dollar reduction in you Current Monthly Income, or CMI, as it is called in Form 22.

Whole Life Insurance

Whole life goes by a variety of names. It is what most people traditionally called insurance. This kind of insurance builds cash value. It is the kind that you can borrow against. In the policy, there is often a schedule that matches cash value available to your age. There is no deduction on the bankruptcy means test for whole life insurance premiums. Congress apparently doesn’t like any chance regular families have to build investments. You can deduct both types of insurance from schedule I of the petition. Makes sense, doesn’t it?

Insurance Cash Value Can Be Exempt in Ohio

Each type of life insurance is treated differently in bankruptcy. I have already covered the differences each receives in the means test. Since term Life insurance has no cash value you have no worries about the trustee liquidating it for your creditors. Whole life insurance is a different question. As I said before, the cash value less outstanding policy loans must be listed as an asset on schedule B. The positive value of your whole life insurance can be exempt in the state of Ohio only if the policy beneficiary is a dependent. If you have whole life insurance and your wife, child, or children are the beneficiaries then all the cash value is exempt and you can keep it even if you file bankruptcy.

If your life insurance is cash value is not exempt in bankruptcy you still might not have to surrender the policy to the trustee. You may have had the policy for eons, or you may no longer be as insurable as you once were. I have had cases where the trustee allowed the debtor to borrow the cash value for the creditors, thereby keeping the life insurance death benefit intact.  If you have whole life insurance it is important to talk about it with your bankruptcy attorney.

Other attorneys playing the bankruptcy alphabet game are:

  1. St. Clair Shores MI attorney writes that L is for Lie, the Big Mortgage Industry.
  2. New York Bankruptcy Lawyer, Jay S. Fleischman says L is for Lien.
  3. Omaha and Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell claims L is for Lien Stripping.
  4. Marin County Attorney, Catherine Eranthe says L is for Lift the Stay.
  5. Colorado Springs Attorney Bob Doig wants you to know L is for Luxuries.
  6. Philadelphia Suburban Lawyer, Chris Carr bit off a big title when he said L if for Long Term Payments, Chapter 13 Plans.
  7. Metro Richmond Consumer Attorney, Mitchell Goldstein notes L is for Liquidated.
  8. Not to be outdone, Honolulu Bankruptcy Attorney Stuart T. Ing writes L is for Lien Stripping.
  9. You need to find out why Allen Park, Michigan Bankruptcy Lawyer, Christopher McAvoy says L is for List It Or Lose It.
  10. Lakewood, Ca Bankruptcy Lawyer, Christine A. Wilton says L is for Levy.

Creative Commons License photo credit: ElGekoNegro

 

 

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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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