Is Life Insurance Protected During Bankruptcy ?

Many reasons exist for declaring bankruptcy, and many of your assets will be treated differently throughout the proceedings so lets take a look at how your life insurance will be protected during bankruptcy. Even if you are undergoing bankruptcy proceedings you still have many parts of your life which may require life insurance protection.

Reasons To Keep Life Insurance

bankruptcy life insuranceOne of the main reasons people decide to purchase life insurance is for asset protection. In the event of a bankruptcy life insurance, many assets may be at risk so someone could argue you would no longer need life insurance for this purpose.

However, if you have a family who relies on your income you still need life insurance despite the proceedings. Be sure when going through your budget for the bankruptcy you include your monthly bankruptcy life insurance payments. If you are looking to save money, you can even look into paying annually. It is generally a 10-15% discount versus monthly payments.

If you are planning on keeping assets such as your home after the proceedings, then you should still have life insurance in order for your family to stay in the home. Your debts should also be covered by life insurance so they are not left to your family if a tragedy were to occur.

Life Insurance Bankruptcy Protection

If you are at a point where you are resorting to bankruptcy, you want to be sure how your life insurance will be protected during bankruptcy. We must first exam how each type of life insurance is protected during bankruptcy.

The two main types of life insurance sold to individuals are term life insurance and permanent life insurance. Term life insurance is temporary coverage which does generate any cash value, and it only pays out upon your death. Term life insurance is also for a definitive amount of time, or the term of the policy.

Permanent life insurance, which includes whole life insurance, is protection which is designed to last your entire life. When you pass away your beneficiary will receive the proceeds from the policy generally tax free.

A very unique aspect of whole life insurance is its ability to accumulate cash value inside of the “wrapper” of the insurance product. This money can be accessed while the insured is still living.

The money inside of a whole life insurance plan can be used for whatever the insured sees fit. Some people use it as emergency funds, or even as large scale supplement to retirement savings. With interest rates very low, the whole life insurance plan has become a go to for investors looking for a safe investment, with decent returns.

Term Insurance Protection

Term insurance protection will not be taken away from you in the event of a bankruptcy since their is really no financial value in the product as of yet. The actual financial piece of the term life insurance plan does not become a factor until the policy pays out.

This is the reason why term life insurance does not play a role during bankruptcy proceedings. However, if you plan on paying life insurance premiums it should become part of your monthly budget.

Treatment Of Permanent Life Insurance

The type of insurance which most people are concerned over during bankruptcy proceedings is permanent life insurance. Their are two reasons why many people are more concerned over keeping this type of life insurance in force.

The first reason is because it is much more expensive so people don’t want to feel like they wasted money on what turns out to be a term policy if you cancel it.

The second reason is the cash value. If you forfeit a whole life insurance policy and take the money it becomes a taxable event.

If you are going through bankruptcy proceedings, the cash value inside your policy is protected as long as you have family listed as beneficiaries on the policy.

Life Insurance Proceeds

Since we have now determined that bankruptcy proceedings have virtually no impact on life insurance which is in force, we can now move on to the impact of life insurance proceeds be passed to someone who is bankrupt.

Lets look at an example.

If you are in the process of bankruptcy proceedings, you most likely will have a trust setup in order for debtors to be able to collect from. If you are the beneficiary of a life insurance policy which is paid out the proceeds will go to the estate or the court.

This means the proceeds would be used to pay off any debts in the account. If the proceeds completely pay off the bankruptcy then you would receive what is left over.

Quick Tips

As you can see, it may not be in your best interest to be the beneficiary of a life insurance policy if you are going through a bankruptcy. On the flip side, you may not want to name someone as your beneficiary if they are in bankruptcy. However, if you own life insurance and are in bankruptcy then it will have virtually no impact.

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