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How does bankruptcy affect life insurance?

Posted by Rory Vohwinkel | Apr 30, 2019 | 0 Comments

When you file for bankruptcy in Nevada, it will affect every aspect of your financial life. Your life insurance policy is no exception. But what happens to your life insurance policy during bankruptcy depends on a few different factors. In some cases, when you receive the proceeds from the life insurance policy of another, it may be included in your bankruptcy estate.

Term Life vs. Whole Life Insurance

The first factor to consider is the type of life insurance policy you hold, as not all policies are equal under bankruptcy law. Under the bankruptcy code, a term life insurance policy is not an asset under your bankruptcy estate. That is because a term policy does not mature until your death. Because the policy has not yet matured, it holds no cash value and is not considered an asset for bankruptcy purposes.

A whole life insurance policy is treated differently. Under a whole life policy, your policy has a cash surrender value. Because of its current value, it can be considered an asset of your bankruptcy estate. Regardless of the type of policy, the premiums must be listed in your schedules filed with your petition. Keep in mind, the trustee in your bankruptcy case may determine that your monthly insurance premiums are excessive. In that case, the trustee can object to maintaining the policy.

Proceeds From a Life Insurance Policy

In your bankruptcy, it is not only your policy that could be considered an asset. If you receive the proceeds of the life insurance policy of another, those proceeds may also become part of your estate. In that case, the trustee can use that money to pay off your creditors.

Generally speaking, only life insurance proceeds received in close proximity to your bankruptcy filing will be considered part of your estate. The proceeds are governed by what is known as the 180-Day Rule. Any life insurance proceeds you receive more than 180 days before or after the filing of your bankruptcy petition are exempt. This means the funds cannot be used by the trustee to pay back your creditors. But if you receive the proceeds of a life insurance policy within 180 days of filing bankruptcy, that money is part of your bankruptcy estate and can be reached by your trustee to pay your creditors.

It makes no difference if the proceeds are received after you have received a discharge or had your bankruptcy estate closed. If the proceeds are received within 180 days of filing, the trustee can reopen the bankruptcy.

Discuss your Life Insurance Policy with a Nevada Bankruptcy Attorney

Even if your life insurance policy or proceeds are included in your bankruptcy estate, there may be other exemptions that can be used to keep the trustee from reaching it. Nevada exemptions are complicated, and with so much to stake missing out on one could be costly. To learn about your options, contact the experienced Nevada bankruptcy attorneys with Vohwinkel Law. Call today to schedule your consultation at no cost to you.

About the Author

Rory Vohwinkel

Rory Vohwinkel began his legal career at one of Nevada's oldest and largest law firms, representing clients in commercial litigation and business transactions. Rory went on to serve as the sole in-house attorney for a national real estate investment and property management company. In 2009, Rory...

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