Many people prefer term life insurance policies to whole life, because you get maximum insurance for the amount spent. However, one benefit that whole life offers that is often overlooked is an exception from bankruptcy. If you are forced to declare bankruptcy, you can usually retain at least a portion of your life insurance proceeds and value, though it does depend on the laws of the state you live in. Depending on the laws in your state and the risks you plan on taking, it might be worth considering the relationship between whole life insurance and bankruptcy declaration as you conduct your financial planning. Here’s a look at some of the bankruptcy laws in the U.S. and how they relate to whole life insurance.
Limited Bankruptcy Protection States
In states like Alaska, Arizona, California, Colorado, Iowa, Minnesota, Mississippi, Nebraska, and South Dakota, your assets may be protected from amounts as low as $10,000 and as high as $50,000. In some states, such as Arizona, this is only valid if you have had the policy for at least two years and a dependent family relative is the beneficiary. In some cases, the amounts protected increase per number of dependents that the beneficiary has. For example, if the money would go to your spouse and you have four children, then the amount might increase for each child you have, in recognition of the expenses that would be required to provide for each beneficiary.
In North Dakota, the maximum exemption is $100,000 per policy and $200,000 aggregate. There are some exceptions, such as cases where there is a reasonable need for support of additional dependents, but in most cases these dependents must be relatives. This same exemption may be applied to annuities as allowed by state law.
Maximum Exemption States
In other states, such as Alabama, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Michigan, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, and Wyoming, the whole amount is exempt, with the caveat being in most cases that the money goes to dependent beneficiaries.
In some states there is a monthly maximum exempted amount, and in other cases, there are further sets of rules and regulations that must be adhered to. In some cases, it depends on the amounts owed to creditors, and in others, on the cash value of the policy.
Annuity proceeds may be treated slightly differently than life insurance proceeds, with monthly amounts or lump sum amounts protected by state laws. However, in some cases annuities are not exempt at all and the entire amount may be liquidated and/or presented to creditors in order to partially satisfy outstanding debts.
By checking the state code for the state that you live in, you can find the complete details on bankruptcy exemptions related to your whole life insurance policy in order to better understand the laws. It’s best to be completely aware of what the laws are in case this is something that you feel you may be affected by.
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