When Insurance Can Be The Death Of You

low flying planeRemember survey courses from college?

Kinda like flying low over new territory without ever landing and getting on the ground?

That’s what I propose to do with the topic of insurance.  Insurance, as we see it in bankruptcy.

It isn’t frequently a hot topic, but when it is, the numbers are large and the possibility for egg on your face is equally large.

Policies owned by the debtor

Insurance, a contract with a provider to pay on the occurance of a specified event, is an asset.  It needs to be scheduled.

Our local practice about scheduling term insurance (pure insurance with no accumulated value) has gone back and forth.

For purposes of symmetry with schedules I and J, I like to schedule it.  If the debtor is paying for insurance, it makes sense to list it. Otherwise, it’s like budgeting for pet care for a pet not visible on the schedules.

If it has a value that the debtor can borrow against or otherwise tap, that value needs to be scheduled.

From an asset perspective, it doesn’t matter whose live is insured.

Insurance that is exempt

The rules get trickier when exemptions come into play.  The Code provides for an exemption in the value of a life insurance policy 1) owned by the debtor and 2) insuring the life of the debtor or someone on whom the debtor is dependent.

So, when the mother in law of my debtor client died soon after he filed, the life insurance proceeds from her policy, payable to him for her funeral expenses, couldn’t be exempted under California’s version of the bankruptcy exemptions.  The debtor wasn’t dependent on the insured; so, no insurance exemption.

Proceeds payable prepetition

When the debtor has received or is entitled to receive payments on account of a death that occurred before filing, we’re looking, not at the value of the contract, but at a pot of money, or a right to a stream of money.

Section 522(d)(11)(C) creates an exemption in the proceeds of a policy of life insurance 1) if the debtor was dependent on the decedent at the time of death, 2) to the extent necessary for the debtor’s support and the support of the debtor’s dependents.  There are two evidentiary hurdles there:  the funds must be traceable, and, they must be necessary for support.

Check your state exemptions for treatment of life insurance and any conditions on exemptability.

Proceeds received within 180 days

Life insurance proceeds and property received under a death benefit plan comprise one of the three exceptions to the concept that property of the bankruptcy estate is a snapshot of what the debtor has at filing.  If the debtor is the beneficiary of anyone who dies within 180 days of the commencement of the case, the benefits come into the estate, subject to whatever exemptions are then available. 541(a)(5)(C).

Plan as necessary

You can be certain that the debtor is unlikely to know or realize he should know the ramifications of life insurance in his bankruptcy case.

It behooves his attorney to explore the lay of the land and the alternate paths through this thicket.

Image courtesy of Flickr and pmarkham.