Life insurance policies bring peace of mind to millions of people throughout California. If someone dies, a life insurance policy could provide for their family. The need for insurance is especially strong if you are the financial provider for your family. By purchasing life insurance, you are buying a safety net for your family in case you die.
A life insurance policy is an asset. If you are thinking about bankruptcy, you will have to list every asset you own, including your life insurance policies. In some bankruptcy cases, debtors are required to surrender certain assets to pay their creditors. Whether you can keep your life insurance policy depends on the type of policy you own and the exemptions you choose. Below, our Roseville bankruptcy attorney will take a close look at insurance policies and bankruptcies.
If you have made the decision to file for bankruptcy or are still weighing the pros and cons, call our California bankruptcy attorney to review your situation. Before filing, you will want to understand how your life insurance policies will be affected. Call The Bankruptcy Group at 1-800-920-5351 to set up a free and confidential appointment.
Life Insurance Policies and the Bankruptcy Estate
Before discussing how filing for bankruptcy will affect your life insurance, you need to understand the concept of the bankruptcy estate. The moment you file for bankruptcy in California, all your property, including your house, savings, personal property, and life insurance policies, become part of the bankruptcy estate. The court will have temporary oversight of your property after you file. For example, a Chapter 7 trustee will evaluate the bankruptcy estate to determine if there is any non-exempt property to sell to pay a portion or all your creditors. If you file for Chapter 13, you will have to pay your creditors through a monthly payment partially based on the non-exempt property in the bankruptcy estate.
To illustrate the above, imagine a person owns an expensive painting. If they file for Chapter 7, the trustee will likely take possession of the painting, sell it, and disburse the proceeds to the debtor’s creditors. In Chapter 13, the painting will be valued, and the debtor will have to pay that amount to their creditors if they wish to keep the painting.
Life insurance is an asset and, if it has a value, could potentially be sold or increase a Chapter 13 plan payment. As stated above, the certain property could be exempt under the law. Think of exempt as protecting your property from the trustee and creditors. In many states, debtors have a choice between the federal exemptions and their local state exemptions. However, in California, debtors are not permitted to use federal exemptions. They must choose between two sets of state exemptions.
Life Insurance Value in a California Bankruptcy
Before discussing the need to exempt your life insurance policy, the value needs to be determined. Life insurance policies are not created equally. Typically, there are two kinds of life insurance policies that people own.
A term life insurance policy will pay out a benefit when the insured dies. Until that occurs, the policy itself has no value. If you have a term policy, then filing for bankruptcy will not affect it.
The other common type of insurance policy is whole life insurance. A whole life policy contains a savings component. Basically, an insured does not have to wait until they die to benefit from the policy. It has a cash value that the insured could draw upon if they choose to surrender the policy for cash value. When you file for bankruptcy, you are must list the cash value of any whole life policy you have.
Life Insurance and California Bankruptcy Exemptions
You must disclose a term life insurance policy to your Folsom bankruptcy attorney. While the policy will be listed on your bankruptcy forms, you will not have to surrender it in Chapter 7 or pay extra in Chapter 13.
If you want to keep a whole life insurance policy, you will have to exempt it under California law. As stated previously, debtors in California must choose between two groups of exemptions. Depending on your circumstances, one set of exemptions will be more beneficial than the other. However, in most cases, the deciding factor will probably not be your life insurance.
The first set of exemptions is commonly referred to as the homestead or the 704 exemptions. When a debtor has substantial equity in their home, these exemptions provide the greatest protection. However, the 704 exemption only allows a life insurance policy to be exempt up to a surrender cash value of $12,800.
The second set of exemptions, commonly known as the wildcard or 703 exemptions, offers debtors more flexibility in protecting their personal assets. These exemptions are for individuals and couples who have little to no equity in their home or who do not own real property.
The insurance exemption under the 703 set allows a debtor to protect up to $14,325 in surrender cash value. Additionally, there is a wildcard exemption that could be applied to any property the debtor owns. This exemption is only $1,425 but could include any of the provided homestead exemption that is not used for the debtors’ residence. Therefore, if no homestead exemption is used, a debtor could protect an additional $28,225 in whole life insurance policies.
Call Our California Bankruptcy Attorney to Review Your Life Insurance Policy and Other Assets
Filing for bankruptcy is never an easy decision. Anyone considering filing should speak with an experienced Sacramento bankruptcy attorney. Unfortunately, there are many misconceptions about bankruptcy. If you are worried about how your assets, especially your life insurance policies, will be impacted by filing, call The Bankruptcy Group at 1-800-920-5351. Our consultations are confidential and free.