Assets such as the cash value of whole life policies and any life insurance proceeds are deemed part of a debtor’s bankruptcy estate unless protected with bankruptcy exemptions. It is important to understand which assets are non-exempt since these assets become part of a debtor’s bankruptcy estate and are, therefore, available for distribution to creditors.
Filing a bankruptcy case creates a bankruptcy estate, a fundamental concept of the Bankruptcy Code. While a bankruptcy case is pending, this estate becomes a legal titleholder of all the debtor’s assets and property rights. However, not all of a debtor’s party are absorbed into his or her bankruptcy estate. Only those assets that are considered non-exempt are included. For an asset to be classified as exempt, it must fall within a bankruptcy exemption, which is either based on state law or federal law. Utah bases its exemptions on Utah, rather than federal, law.
There are two common forms of life insurance – term life and whole life insurance. A term life policy has no cash value, while whole life does. Both types of policies pay a designated amount to a named beneficiary.
Term life insurance matures upon the death of the insured and guarantees payment of the policy’s death benefit if the insured dies during the term specified in the policy. Term life has no value other than its stated death benefit. Unlike whole life, there is nothing of value in a term life insurance product. Because a term policy does not have any cash value, a debtor need only exempt the cash value of a whole life policy.
Currently, Utah law exempts:
*the proceeds or benefits of any life insurance contracts or policies paid or payable to the debtor or any trust of which the debtor is a beneficiary upon the death of the spouse or children of the debtor, provided that the contract or policy has been owned by the debtor for a continuous unexpired period of one year. §78B-5-505(1)(a)(xi);
*the proceeds or benefits of any life insurance contracts or policies paid or payable to the spouse or children of the debtor or any trust of which the spouse or children are beneficiaries upon the death of the debtor, provided that the contract or policy has been in existence for a continuous unexpired period of one year. §78B-5-505(1)(a)(xii);
*proceeds and avails of any unmatured life insurance contracts owned by the debtor or any revocable grantor trust created by the debtor, excluding any payments made on the contract during the one year immediately preceding a creditor’s levy or execution; §78B-5-505(1)(a)(xiii).
Life insurance proceeds if the beneficiary is the insured’s spouse or dependent and if the proceeds are needed for support.
The Morrison Law Group can help if you’re delinquent paying your mortgage and facing foreclosure or you owe back taxes. We can help if you are receiving harassing phone calls or collection letters. The Morrison Law Group can help if you just need to talk about your Chapter 7 or Chapter 13 bankruptcy options. Call 801.456.9933 today to schedule a FREE consultation. We have locations in Ogden, Logan, Sandy, and St. George to serve the residents of the counties of Weber, Cache, Salt Lake, Utah, Morgan, Davis, Washington, and surrounding areas.
