How Private Bankruptcy Impacts Your Life Insurance Policy

12 Feb

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Filing for bankruptcy is normally person’s worst nightmare, but when it comes to safeguarding your assets (which includes the worth of your life insurance policy), info is essential.

A life insurance policy is regarded useful home, which signifies creditors may possibly try to “obtain an interest in the policy’s values,” but all states and the federal government have “enacted legislation offering protections for life insurance against the claims of creditors,” says Glenn E. Stevick, Jr., a professor with The American College.

Here’s some fundamentals you ought to know when it comes to bankruptcy and how it impacts your life insurance policy.

1st, much more folks file for bankruptcy than you may possibly envision. With the most current economic downturn and mounting bills, the current bankruptcy-filing rate is at a 5-year high, according to recent data released by Automated Access to Court Electronic Records (AACER). What’s more, the American Journal of Medicine reported that far more than 1.5 million individuals filed bankruptcy final year, 60 % of these filings had been the direct result of medical bills.

The American Journal of Medicine, for instance, discovered that 1 in 25 folks in the Bay Location have filed for bankruptcy last year, says bankruptcy attorney, Jeena Cho of San Francisco-based JC Law Group.

“It really is like the dirty tiny secret,” Cho says. “Two things that we do not talk about are death and funds. When individuals start off talking about their financial issues, they find there are lots of individuals in the very same boat.”

There are two kinds of bankruptcy for individuals: Chapter 7 and Chapter 13.

Chapter 13 is exactly where you can hold on to your assets and are not at danger for losing house, but you ought to repay some of the debt more than a three to 5 year period. If your cash worth for life insurance is worth much more than the exemption in your state, then take into account filing Chapter 13 to shield your assets, Cho recommends.

If you pass a indicates test and can file a Chapter 7, you need to liquidate your possessions and assets, which normally takes four months. It also indicates your life insurance policy could be impacted.

Cho says one of the worst things someone can do is liquidate their assets and begin borrowing money from their life insurance and retirement funds, which are almost constantly protected in bankruptcy.

“People begin taking what ever small income they have to see if they could get out of debt by re-paying it,” Cho says. “I see men and women drain their $40,000 retirement fund for $100,000 in credit card debt. They start off selling their autos and properties without having an exit method. The game program is to hold as much as possible.”

Also, make positive you disclose everything including the existing, correct cash value of your whole life insurance policy. Some people never “due to the fact they are afraid to and finish up losing it since they failed to disclose it’s accurate value,” says David Leibowitz, a bankruptcy lawyer for Lakelaw in Chicago, Ill.

Underneath state and federal bankruptcy law, an person filing for bankruptcy may elect exemptions underneath federal or state law, but not each. Explains Stevick, 34 states like Illinois, New York, California and Florida have “opted out” of the federal law and have inducted their personal state protections.

Sixteen “selection states” – such as Texas – allow debtors to choose among federal and state exemptions. Below federal exemptions, a single can protect up to $10,775 of a life insurance policy’s cash value (doubled for married couples). Also, in some states the unused portion of the homestead exemption (genuine and private house) might be utilized for other property, which includes the cash value from a life insurance policy. Some states require the policy to be in force for a single to two years for protection under a state exemption, to avoid employing life insurance as a shelter in bankruptcy arranging.

In order to be eligible to file bankruptcy beneath state protections, you need to be regarded a resident and live in a state for 24 months.

In Illinois, whole life insurance is exempted from creditors to the extent that it is needed to assistance a dependent (a spouse and dependent children), but the legal interpretation is up to your bankruptcy judge.

When you file your bankruptcy petition you will typically include a schedule or list of your exempt house, which can include your .

Ron Caruthers, a financial planner, who helps men and women pay for college with more than funded life insurance policies, says Florida, is the most debtor-friendly state to file bankruptcy since it has a robust homestead exemption. Another debtor-friendly state is Texas, which enables large exemptions for cattle and homesteads.

“It is why O.J. Simpson took all his assets and moved to Florida and put them into life insurance and a property, considering that they couldn’t touch either when he filed for bankruptcy,” Caruthers says.

On the opposite finish of the spectrum is Arizona. Caruthers says Arizona is the most creditor-friendly state.

Hold in thoughts that all 50 states are different when it comes to bankruptcy protections, so it is best to contact a economic planner or bankruptcy attorney in that state to learn far more.

Here are some suggestions for what to appear out for prior to you file for bankruptcy.

Death positive aspects: How a lot of the proceeds in the death advantage are protected against creditors (some state have a dollar quantity like $5,000 or $10,000 other states permit the complete amount.)

It is crucial to evaluation how a lot of your life insurance policy is protected. For example, in California an unmatured policy is exempt up to $11,475 for homeowners filing jointly or separately beneath code 704 (c ), non-home owners file beneath 703.140 (b) which makes it possible for for up to $11,800. Say your life insurance policy exceeds $11,475 than you can use the wild card exemption of $23,250, which can be applied in component or in whole to the policy as nicely.

Appear up the exemption statistics where you do enterprise because each and every state is different. Spend close attention to differences in state and federal laws and what parties are protected – the policy owner, beneficiaries, and so on.

20 Responses to “How Private Bankruptcy Impacts Your Life Insurance Policy”

  1. Tai May 3, 2013 at 5:51 am #

    My parents took out a life insurance policy on me when I was a baby back in 1968. I’m not sure as to how long this was paid up & it has accured interest. They are both deceased & I have to send Met Life a copy of both of their death certificates before they can change it to my name & I can cash it in. I’m wondering just how long does this process take as far as the change in ownership?
    Just as an FYI, I called Met Life yesterday & they had both of my parents info. However since they were the owners of the policy they could not release any info. I do have plans to cash it in no matter what.

  2. Guillermina June 19, 2013 at 4:44 pm #

    I do not have alot of money and I am trying to find a life insurance policy that I can afford for my mom. Sha has cancer in her throat and I can not find an insurance company that will give her insurance under $100 a month. Ant ideas?

  3. Sal July 26, 2013 at 2:27 am #

    I have strong reason to believe that members in my family have a life insurance policy on me.

  4. Alden July 29, 2013 at 2:00 am #

    I am considering selling some of my annuity payments for a lump sum, but required to have life insurance policy as collateral. I currently have a policy which is more than needed to cover the amount needed, but dont know much about using as collateral. What types of policies are assignable? I know you can designate a beneficiary on the policy, but dont know if there is a certain type of policy needed for this purpose. Any info is greatly appreciated and thank you in advance.

  5. Sixta August 28, 2013 at 12:13 am #

    Can the beneficiary of a life insurance policy be forced to pay for a funeral? Also – what if the beneficiary is a 10-year old boy..?
    Thanks for anyone having info ….

  6. Ronna August 29, 2013 at 11:14 pm #

    If I make a will and a life insurance policy in Florida, would both of them be valid in Hawaii or would I need to update it? Sources?

  7. Mitsue September 2, 2013 at 7:26 am #

    My grandmother is almost sixty years and she does not have a life insurance policy. We were talking and I asked her what she had in place in case of a situation. She said nothing. Her plan is for us to sell her house and split the money.

  8. Manuel September 14, 2013 at 5:40 pm #

    I want to cash out (surrender) my life insurance policy. I’ve had it for more than 20 years and it totals more than 10k, but the taxable portion is not. If I were to allow them to withhold the 10% of the taxable portion of the cash surrender value, do I still have to put it on my tax returns? Or should i check the box for “Do not withhold federal and state income tax” and do it myself?

  9. Imelda September 14, 2013 at 10:04 pm #

    We have had our Permanent Life insurance policy for a year now. It is a policy for $25,000. Our monthly premium is $25.14 a month and we have paid that for 12 months now? How much cash value do you think we have invested in it? We are in a desperate financial need right now, and need to borrow some money from our policy.

  10. Lesley September 15, 2013 at 4:35 am #

    My mom passed away last fall. Before she died, she told me that she had a $10,000 life insurance policy for which I was the sole beneficiary. My stepfather was the beneficiary for all other policies. At the time, I didn’t want to talk about it because I didn’t want to think about her passing away (she was only 54). Now that she is gone, I would like to locate the policy, but I can’t find documentation. What is the best way to go about finding out who the claim was through? Any advice is greatly appreciated. Thank you!

  11. Miquel September 15, 2013 at 4:35 am #

    My father in law had a life insurance policy that stated who the beneficiaries were. A few months ago he re-wrote his will and in the will stated that he no longer wants the original beneficiaries but rather some other ones. The policy was never changed, and he is now deceased. Do we go with the policy or the will?

  12. Lane September 15, 2013 at 7:50 pm #

    I inherited a flexible variable life insurance policy that my now deceased grandfather bought for me a long time ago. The value on it has gone down in value by about $900 since I found out it was mine 3 months ago…should I just cash it out now or is there a smarter way to cash out the surrender value (it’s tied to the stock market…so I know there’s probably not much I can do)? Help please.

  13. Kimberli September 16, 2013 at 9:43 pm #

    My aunt died recently, and she had a life insurance policy no one knew about, and my mom is the beneficiary. She wanted me to find out how much interest can be accumulated from a general policy. It was never updated, and it was just sitting there gaining interest since the 1960’s. The original amount was $500. Does anyone have an estimate of how much it could be worth now? My mom told me if i found out, and helped her, she would give me some money 🙂

  14. Norbert September 17, 2013 at 4:08 am #

    I am going to study in Poland, Germany, and China for an MBA program. I will be gone for almost 11 consecutive months. My parents have asked me to purchase a life insurance policy for a couple thousand dollars. Isn’t that weird, or am I just over-reacting? I am only 22 years old. Why would I need a life insurance policy for a couple thousand dollars?

  15. Jenell September 17, 2013 at 5:33 pm #

    My mother wants to get a life insurance policy through Colonial Penn, but we are planning to move permanently to England in about 2 and a half years. Will this policy still be valid there or???

  16. Noemi September 18, 2013 at 8:52 am #

    Is there a way to find out if someone has taken out a life insurance policy on you, without your knowledge, much less permission? And if they have, is there a way to have that policy cancelled or any other legal reprocussions?

  17. Marvin September 19, 2013 at 2:30 am #

    When someone dies with a will & a life insurance policy can that policy be tapped to pay their medical bills? The policy is in a Trust for the daughter’s college fund.

  18. Nettie September 21, 2013 at 9:36 am #

    I just turned 19, my life insurance policy just started and I don’t want it. I know that you can cancel it by stop paying for it, but what if it’s connected to my bank account?

  19. Milford September 21, 2013 at 2:55 pm #

    My Dad told me he named me on a life insurance policy. He just died. Because of certain family dynamics, I may not ever receive information regarding this policy. Is there some way I can contact the major companies to find out if the policy is with them? What information might I need to give them? Can I do it on the phone or in writing? I just need to know which one and then I can provide them with the death cert etc.

  20. Margarite September 23, 2013 at 5:14 am #

    Recently I have begun to face some financial situations. I am thinking about closing my life insurance policy to help me cover some debts and maybe later down the road purchase a better/cheaper policy. If I do this, what can I expect as far as a check from the company? Do I just get back the money I put into it? ie: my money from all the premiums I’ve paid.

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