Whole Life vs. Term Life

A first step that a competent Arizona bankruptcy lawyer will take is to determine whether a debtor owns a whole life insurance policy or a term life insurance policy.  A whole life insurance policy is one that has a cash surrender value.  Even before death, the owner of such policy can borrow money or cash it out, depending on how long the life insurance policy has been in place and how much money has been paid in premiums.  A term life insurance policy is more common,for more information about the different types of insurance, visit Clearwave.  It has no cash value.  When the owner dies, a money benefit is paid to the owner’s listed beneficiaries.  The owner cannot cash it out or borrow money from it.  For bankruptcy purposes, a term life insurance policy has no value and generally is not affected by the debtor’s bankruptcy filing.

Is the cash surrender value exempt?

Under Arizona law, debtors are allowed to keep exempt property.  The cash surrender value of a whole life insurance policy is exempt and protected in bankruptcy, provided that the insurance policy has been in place for a continuous unexpired period of two years and the designated beneficiaries are “the debtor’s surviving spouse, child, parent, brother or sister, or any other dependent family member”.  For example, if a debtor has a whole life insurance policy with a cash surrender value of $20,000 that has been in place for two years and names his 10 year-old daughter as a beneficiary, the $20,000 is probably exempt and cannot be taken by the bankruptcy trustee.  The 9th Circuit Court of Appeals has ruled that the beneficiary does not necessarily have to be financially dependent on the debtor (such as the debtor’s adult child who is self-sufficient) in order to take advantage of this exemption.

A competent Arizona bankruptcy lawyer will need to analyze the policy to determine its value, its inception date and the nature of the beneficiaries listed.  Some pre-bankruptcy planning may be necessary in order for the debtor to be able to obtain the benefit of the money held in the life insurance policy prior to filing bankruptcy.  And this type of planning can be extremely tricky.
Wealthy people needing advice on estate life insurance can find more information about a second to die policy at Affordable Life USA.