The question of whether a whole life insurance policy may be preserved in bankruptcy is a common one. A life insurance policy with a cash value is known as a whole life insurance policy. Whole life insurance is more expensive than standard term life insurance, but many people use it as a retirement planning tool.

Whether or not a whole life insurance policy may be preserved in bankruptcy, like any other piece of personal property, depends on the individual’s position and the amount and value of personal property owned.

Most of the time, if not always, the face value of your whole life insurance policy will be protected if you apply for Chapter 13 bankruptcy. You can keep all of your assets, including those that exceed the exemption level, if you file for bankruptcy under Chapter 13, also called a Wage Earner’s Plan.

On the other hand, whether you can keep them in a Chapter 7 bankruptcy is very variable. Start by determining if your exemptions are federal or state-specific. You can’t mix and match different sets. And how much do you have in the way of assets? Personal possessions, such as a house, automobile, bank accounts, stocks, bonds, and so on, all play a role in determining which set to utilize. Don’t file without consulting an attorney to see which set is best for your situation. Otherwise, you run the danger of losing your valuables.

11 USC 522 (d)(8) permits for an exemption of $11,525 of the cash value, which is increased every three years. A $10,000 cash value allows you to exclude your whole life insurance coverage. Your creditors and trustees will be unable to seize them if you do. The amount of the debt you have against the cash value can also be deducted when computing the exemption amount. So, if you have a $25,000 cash worth but a debt of $15,000 on it, you need to exclude $10,000â€â€Âno need to worry.

Some states are more lenient than others. For example, Michigan has a far more generous exemption. You are allowed to deduct the total cash value under Michigan’s exemptions. Isn’t it fantastic? Remember that you can’t pick and choose between the federal exemptions and the state exemptions. Federal allowances are more than Michigan’s, although Michigan has more generous provisions.

Talk to a qualified bankruptcy lawyer about your assets’ worth. Only an experienced bankruptcy lawyer can protect what you’ve worked so hard for, so don’t try this on your own.

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Kathy Hollingsworth
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