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Life insurance is an important financial product. It helps you protect your family in the event of your death. For some, it also acts as a savings, investment, and retirement plan that may or may not pay out death benefits.
If you have a life insurance policy you should make sure your bankruptcy lawyer knows about it. It could have a big impact on your overall case strategy. Attempting to DIY a bankruptcy when you have any kind of policy could create future financial problems for you and your family.
Nevertheless, we’re happy to give you a broad overview of the major issues involved in life insurance decisions as they apply to bankruptcy.
Life Insurance Type
A whole policy will work differently than a term policy. One is an asset. The other isn’t.
A term policy is just a piece of paper. It has no value until you die, and any money it pays out will go to your beneficiary rather than to you.
This means it is not an asset. If anything, it’s just another monthly bill you have to pay, which means it reduces your disposable income. Life insurance, and other important types of insurance like health insurance and disability insurance, are considered “allowable expenses” both when you’re attempting to pass the bankruptcy means test and when you’re calculating disposable income for the purposes of proposing a Chapter 13 repayment plan to your trustee.
Whole policies are assets. Whole policies accumulate cash value. Your insurance company is depositing funds into an investment account on your behalf. You could withdraw that money lump sum. You could take dividend payments to pay some or all of your bills. This is why this product is such a popular retirement solution.
A whole life insurance might pay a beneficiary, but only if you die before the policy expires. That means for the most part this life insurance product is for you. It represents a sum of money which might be taken and given to creditors if you aren’t careful.
Losing assets isn’t automatic. If you file Chapter 13 your assets aren’t taken in the first place. If you file Chapter 7 some assets are taken. Others are protected by bankruptcy exemptions.
If you have a significant amount of value built up in your whole policy you’ll probably want to file Chapter 13, but you should always check with your bankruptcy attorney, who will need to look at your entire financial picture to recommend what will be most advantageous to you. After all, there may be other assets you need to protect, or other issues which might prevent you from filing a certain bankruptcy chapter.
If you’re thinking about filing for bankruptcy you don’t have to make these decisions or research these issues alone. You can call us to schedule a free consultation. We’ll go over your entire financial situation with you and help you decide if bankruptcy is the right solution for you.