In filing chapter 7 bankruptcy, is the cash value in a personally owned whole life insurance policy exempt property?

Asked almost 4 years ago - Tacoma, WA

I do qualify for chapter 7, but I wanted to keep my life insurance in force without cash surrendering it. I thought that in Washington my personal life insurance was free from the claims of creditors.

The cash value is about 60,000 and the face amount is $400,000. I have owned it for several years but have not contributed to it in over a year. Could I keep the asset in a chapter 7 filing?

Attorney answers (3)

  1. Roger Jay Sharp

    Contributor Level 11

    Answered . You would not be able to exempt this asset under Washington law. The Washington statute dealing with life insurance is RCW 48.18.410. It protects a beneficiary's right to proceeds or avails of a life insurance policy on the life of another. It does not protect the cash value of the owner of the policy.

    However, you really should not stop with just the above answer to your question. Determining what is best for you requires consideration of your entire situation--not just of the available exemption for a single asset.

    Helping you maximize the benefit of available exemptions is one of the most important things a bankruptcy attorney can do for you. Sometimes some pre-filing planning and pre-filing transactions are appropriate and can allow the debtor to protect more of the property Congress intended to make available for a fresh start after bankruptcy. Non-exempt assets such as the life insurance proceeds can in some instances be used to acquire exempt assets--equity in real estate or additional contributions to retirement plans, for instance.

    The more time that passes between the pre-filing transactions and your bankruptcy case filing, the less likely you are to face challenges to the pre-filing transactions. In addition, one cannot go crazy. Pigs live to grow up, but hogs get slaughtered. Being too aggressive with pre-filing transactions to convert non-exempt assets into exempt assets can invite trouble with the US Trustee's office. You can be aggressive, but you cannot be stupidly greedy.

    Even without planning a portion of the cash value in your life insurance policy could be protected under the "wild card" exemption available under the federal exemptions, but using the federal exemptions may not be best for you depending on your other assets and liabilities.

    The bottom line: With at least $60,000 involved it would be worth it for you to spend some money speaking with an attorney to advise you of your options. You should agree to pay the attorney's hourly rate, but you will save money and make it easier for the attorney to give you good advice if you prepare a written list of all of your assets and of all debts secured by any of your assets, and provide the list to your attorney before your meeting or telephone consultation. You should also be prepared to tell your attorney the gross income you and your spouse, if any, earned in the six full calendar months before your consultation. Your attorney would then be able to immediately focus on considering options available to you rather than interviewing you on your assets and liabilities.

  2. Jeffrey B. Lampert

    Pro

    Contributor Level 19

    Answered . For this question you need a WA lawyer. I am not licensed in WA and so cannot give you legal advice. I can tell you, though, that the bankruptcy software that I use lists Washington's exemptions, and cash surrender value is NOT listed. Proceeds, yes. CSV no.

    You really need to consult with a WA lawyer; it may well be that case law has interpreted the statutes differently.

    Take care.

  3. Jason Lee James

    Contributor Level 10

    Answered . The amount of exemptions, or whether you can even exempt that particular property, varies from state to state. Typically, a major determination will be whether the insurance is term or whole life and if it has cash surrender value. However, you should contact a bankruptcy lawyer in your state to determine if it even qualifies for an exemption.

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