Life Insurance and Bankruptcy

For those individuals who have dealt with or will be dealing with bankruptcy, it is not uncommon for them to wonder how such an event will impact their life insurance policies.

While everyone's situation will differ to some degree, individuals might be able to retain their home following a bankruptcy following, and they will be able to keep a specified amount of the cash value that has accumulated within any permanent life insurance policies they own.

Even though bankruptcy courts look at cash value within life insurance as an asset, federal law does allow an individual declaring bankruptcy to 'exempt' some types of property from creditors in order to begin anew.

If you are married, you and your spouse might be able to double all exemptions under the federal bankruptcy code.

According to the federal bankruptcy law, each state can 'opt out' of federal exemptions and put in place their own guidelines as they relate to assets individuals can protect from creditors during a bankruptcy. A large number of states chose to opt out and others allow individuals to select between state or federal exemptions.

Individuals are not permitted to take both the federal and state exemptions; when undertaking a bankruptcy following you are required to choose one or the other.

Additionally, if you do not need to use the real estate exemption to protect your residence, or don't need to use the full exemption amount, you can apply up to nearly $10,000 to protect added assets from creditors.

Other benefits for your dependents, such as unemployment benefits, health insurance and disability benefits, are also prohibited from being taken.

In the event you are eligible for a federal exemption in your state, keep in mind that the state determines what is upheld in bankruptcy court inside their jurisdiction.

To find out what exemptions you might be eligible for, it is best to consult with an attorney who knows the bankruptcy rules where you reside.

Be sure to entirely disclose the various types of coverage you have to your attorney so the attorney can provide you with the right advice on how to protect those assets.

Going through a bankruptcy is never easy, but knowing the tax implications with your life insurance policy can make things a little easier.

That way, you do not come across any unexpected surprises.