Make sure you understand your rights and responsibilities before you file.
If you are considering filing for Chapter 7 or Chapter 13 bankruptcy, one step you need to take as soon as possible is to take stock of your entire financial situation. All of your debts and assets need to be accounted for, including any assets you may have or benefits you may be owed under a life insurance policy.
Can you lose your life insurance in bankruptcy? The short answer is, "it depends." South Carolina's laws governing life insurance in bankruptcy are complex, and you need an experienced bankruptcy lawyer to sort out your situation.
Bankruptcy distinguishes between term life insurance and permanent life insurance
While a full discussion of life insurance is outside the scope of this blog, to understand how life insurance works in bankruptcy, you first need to understand the distinction between the two broad categories of life insurance: term life and permanent life.
- Term life insurance lasts for a fixed length of time, such as 10, 20, or 30 years. If the insured person dies during the term, then the value of the policy is paid to the named beneficiary; if the insured person is still alive as of the end of the term, the policy simply goes away. Term life insurance generally isn't considered an asset in bankruptcy because it has no cash value until and unless the insured person dies.
- Permanent life insurance is an umbrella term for several types of life insurance, including whole life, universal life, and variable life. These types of life insurance last for the entire lifetime of the insured person (or sometimes until the person is 99 years old). Permanent life insurance policies also accumulate cash value over their lifetime, meaning they generally count as assets in bankruptcy proceedings.
As such, if you have a term life insurance policy, you don't have to worry about losing it in bankruptcy. You do have to list the policy on your bankruptcy forms, but because it has no cash value, it has no value to your creditors or the bankruptcy trustee.
But if you have whole life, universal life, or any other sort of permanent life insurance, the cash value of that policy is considered an asset included in your bankruptcy estate. That means it may be subject to liquidation in Chapter 7 or affect your repayment plan in Chapter 13, unless an exemption applies.
South Carolina's exemptions for life insurance are complex
While bankruptcy itself is governed by federal law, in South Carolina, bankruptcy exemptions—that is, the rules for which property you can protect from being sold to pay off your creditors—are controlled by state law. South Carolina does not have a single law that governs life insurance policies in bankruptcy. Rather, whether you can get an exemption to protect your life insurance depends on several factors, including but not limited to:
- The value of the policy,
- Whether you are the insured person or a beneficiary of the life insurance policy,
- Whether the policy is individual or group life insurance,
- Whether you are dependent on the policy for support,
- Whether the policy was obtained within 2 years of filing for bankruptcy, and
- Whether the policy is matured or unmatured.
In short, this means there is no simple, hard and fast rule for life insurance in bankruptcy under South Carolina law. It depends on the specific policy language and the surrounding circumstances. It also may depend on how the bankruptcy court interprets the applicable laws. The only way to know how your life insurance will interact with bankruptcy is to talk to an experienced South Carolina bankruptcy lawyer.
Talk to a bankruptcy attorney today
If you are considering filing for bankruptcy in South Carolina, you need to know how the bankruptcy process will affect all of your assets, including life insurance, before you move forward. That's why it's important to speak with a bankruptcy lawyer right away. Talking to a lawyer doesn't mean you have to file bankruptcy; it means you can make an informed decision. Schedule your free consultation with Benjamin R. Matthews & Associates, LLC today. We'd be happy to review your life insurance policy and other assets, explain your options, and help you decide whether it's time for a financial reset.