If you have a life insurance policy and are considering a Chapter 7 or Chapter 13 bankruptcy, you need to seek legal counsel to see how that policy would be affected.
If the life insurance policy is an unmatured term policy, then it would not be affected by the filing of a bankruptcy petition. Any periodic life insurance premium which is a reasonable expense is includable in your Schedule J budget on your petition.
Whole life insurance policies are treated differently. They have cash surrender value. This means that you can terminate the policy at any time and receive a check. In Chapter 7 and Chapter 13 bankruptcies, the cash surrender value of a whole life insurance policy is considered to be an asset of the debtor’s estate which may be available for distribution to creditors.
A debtor can exempt up to $12,625.00 in cash surrender value of a whole life insurance policy under Federal exemptions. S/he may also be able to use all or part of the “wildcard” exemption to protect additional cash surrender value, depending upon what other assets the debtor owns.
If a Chapter 7 debtor has unexempted cash surrender value in a whole life insurance policy, it is possible if not likely that the trustee will require the debtor to liquidate that policy and transfer the proceeds to the trustee for distribution to creditors.
In Chapter 13, the trustee would require that an amount equal to the unexempted cash surrender value of a whole life insurance policy be included in the debtor’s plan payment for distribution to the debtor’s unsecured creditors.
