Are Life Insurance policies protected in Bankruptcy?

Upon the filing of a bankruptcy case, a bankruptcy estate is created from all the property in which the debtor has an equitable or legal claim. The debtor can protect property and take it out of the estate by claiming exemptions. The state of Florida provides debtors a set of exemptions if the debtor has resided in Florida for at least 730 days prior to the filing.

The exemptions that are available to Florida debtors for protecting life insurance policies are outlined below. It is important before filing the bankruptcy case to evaluate whether the policy fits into an exemption, otherwise it could be subject to being turned over to a chapter 7 trustee for administration or result in a chapter 13 plan payment that is not feasible.

Life Insurance Policies

There are two different types of life insurance policies, term and whole. Term life insurance is more of a contract right than an asset in that if you stop paying the premium, there is no value to be recouped by the insured. Whole life insurance policies are different since the policies often have cash surrender values. This cash surrender value is an asset of the debtor (the insured).

A whole life insurance policy with a cash surrender value can be exempted pursuant to the provisions for Fla. Stat. §222.14. This exemption in consideration of public policy should be liberally interpreted in favor of the debtor claiming the exemption. Section 222.14 provides that:

The cash surrender values of life insurance policies issued upon the lives of citizens or residents of the state and the proceeds of annuity contracts issued to citizens or residents of the state, upon what ever form, shall not in any case be liable to attachment, garnishment or legal process in favor of any creditor of the person whose life is so insured or of any creditor of the person who is the beneficiary of such annuity contract, unless the insurance policy or annuity contract was effected for the benefit of such creditor.

If the insured and the owner of the policy are not the debtor, Florida courts have ruled that the exemption is not available to protect the cash surrender value of the policy.

Life insurance Proceeds

After the death of the insured, the life insurance proceeds are protected from creditors by Florida Statute §222.13. This means that the creditors cannot seek to collect from the proceeds or make claims to the proceeds that would decrease the amount to be received by the beneficiary under the policy. The exemption for this would be if the insured, or the insured’s estate, is also the beneficiary of the policy.

Beneficiary receiving Proceeds

If you are a beneficiary of life insurance proceeds which you have received prior to filing, or the right to receive the funds is triggered before filing, then the funds are not protected. Florida Statute §222.13 protects the proceeds from the creditors of the insured, the decedent, and not the creditors of the beneficiary. Not all money/cash is created equal, so exemption planning with an experienced bankruptcy attorney will be important with the exposure of policy proceeds received before or within 180 days of the filing of a bankruptcy case.

Exemption planning is an essential part of the preparation of a bankruptcy case. If considering bankruptcy, it is important to consult with an experienced bankruptcy attorney who can advise you on the exemptions available to you and how to defend your claimed exemption against the attack of a trustee or creditor objection.