Life Insurance Payout Question

[BKINAZ]

Never thought I would need an answer on life insurance at 48yrs old...never thought I would file for BK at that time also. But again...I didn't think I would have a heart attack and quad/bipass at 45 yrs old either...btw I am in good health now but you never know right...so...

My wife didn't get us into this (debt) mess, I suppose me not making it out of BK alive is more of a possibility than most. How can I protect her? You may not have that answer, but hopefully you will have one for this question?

Lets say my debt is $300k and my settlement that I am paying back is $300 a month for five years. ($18,000). Year 3 I don't make it...my wife collects $250k...BUT here in Arizona, she only gets $20k because of the bankruptcy.

Will they apply that $230k ($20k to her) to my intitial $300k debt, or the $18k that I was paying for BK? I assume the answer...but humor me.

[StartingOver08]

Well, I think you know this answer....she gets the $20k. The Trustee gets 10% (or whatever the Trustee fee is for AZ) and the creditors get the rest.

[BKINAZ]

Hmmmm...guess I'll have to see what $500k insurance on me is.

[woeisme]

Not necessarily true

Life insurance proceeds are not treated the same as windfalls, like winning the lottery. It varies from state to state. See this article I found at insure.com for more details... Basically it says your wife might be partially to completely protected, depending on your state rules. Ask your attorney about your specific rules before upping your life insurance policy. I've cut and pasted parts of the article below.

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How personal bankruptcy affects your life insurance and annuities
By Insure.com
Last updated Jan. 17, 2009

Whether you are facing bankruptcy or considering it, one of the biggest questions you may have is how your lifestyle and property will be affected.
Protect your life insurance.

Although bankruptcy courts consider cash value within life insurance an asset, "federal law permits a person declaring bankruptcy to 'exempt' certain types of property from creditors to make a fresh start," says Weldon "Reed" Allmand, a bankruptcy lawyer in Texas.

"Typically, life insurance and annuities are treated differently than other assets because of the nature of the proceeds, and the cash value is paramount to providing protection to the family," says Cliff F. Wilson, President of the National Association of Insurance and Financial Advisors (NAIFA). The courts want the policy to continue to provide life insurance protection. Wilson notes that some states require you to have had the policy for one to two years in order for it to be protected under a state exemption.

Other benefits for your dependents (including disability benefits, unemployment benefits and health insurance) are also exempt from seizure.
Even if you are eligible for a federal exemption in your state, remember that the state decides what is upheld in bankruptcy court within their jurisdiction.

"You'll find that most states have passed laws that follow the federal guidelines but have specific differences," says Allmand. "If you cash in an insurance policy before you file for bankruptcy, the proceeds may not be exempt from seizure under law."

For example, Nevada will exempt a life insurance policy or proceeds if the annual premiums are not over $1,000. Nevada also lets you protect annuity payments up to $350 a month.

In Florida, the cash value of a life insurance policy may be exempt, but only up to the value of a policy owned by the debtor to insure his own life. If a debtor purchases life insurance on the life of another person, such as his spouse, the cash value of that policy is not exempt under Florida law. Even so, Florida law protects all of the cash surrender value of life insurance policies and annuity proceeds from action by creditors, without limitations, for the beneficiary of the policy.

Insurance benefits for a debtor in Texas who is the beneficiary of the insurance policy are exempt with an unlimited dollar amount. This extends not only to life insurance but also to health, accident, mutual and fraternal insurance policies, as well as annuities or benefits provided by an employer.

To determine what exemptions you may qualify for, Allmand recommends consulting an attorney familiar with bankruptcy rules in your state. He also advises that you disclose all your life insurance policies to your attorney.

"They should fully disclose all the different types of coverage they have to their attorney, so the attorney can give them accurate advice and a game plan on how to protect those assets," he suggests.

[BKINAZ]

You always wish the examples are your state...they never are. Thanks for the post, I am seeing an attorney tomorrow, that will be the top of my list of questions. Of all things that are protected...you'd think life insurance would be one of them?

I dunno...I kinda though that if we could amend our Trust to state that any life insurance money obtained prior to 50 yrs old (she's 41) would be held until her 50th birthday. Guess that doesn't work either? Hey...I'm trying...

[StartingOver08]

I had my life insurance proceeds going to my Trust when I met with the attorney. He told me to change it to the beneficiaries directly (my 2 daughters). Make sure to check that with your attorney.

[BKINAZ]

I will do that...and actually that was my first thought. (changing beneficiaries) But I would do my wife's parents or my brother since we don't have kids...either way, my second thought was they would say..."ahh...why aren't you leaving it to your wife?"

I just don't know the size of the microscope I will face.

[woeisme]

you said the debt mess is yours, does that mean the debt is all in your name? or occurred prior to marriage? Just thinking out loud here, but if you aren't in a community property state, and file BK alone instead of joint, can they still come after your wife if something happened to you? Just something to run by the lawyers, whether or not she is liable for the debt, and if she's not, then how could they take her $ from her if something happens to her and your BK filing isn't joint...

[BKINAZ]

No, (debt in only my name) that would be good thing and good things aren't falling off the trees right now. Our debt is in our name, and regardless we are community property. But good out of the box thinking...what I am looking for.

I don't know what our money manager (oxymoron all things considered) has in mind (talked to him a couple hours ago), but he is taking our Life Insurance issue to their legal...I assume "their" is the Life Insurance company we are with...to see if there are options.

[BKINAZ]

WHOO HOO! I am now convinced because of this site and the guy that handles our insurance...I know more than the two lawyers I have met with. He has found an Arizona statute that is a great thing for us BK in Arizona.

AZRevised Statute 20-1131:

Exemption of life insurance proceeds and cash values from creditors

D. If, for a continuous, unexpired period of two years, a policy of life insurance has named as beneficiary the insured's surviving spouse, child, parent, brother, sister or any other dependent family member, then, in event of bankruptcy or in any proceeding before any court in this state, the cash surrender value of the insurance, in the proportion that the policy names any such beneficiary, shall be exempt from claims and demands of all creditors, other than a creditor to whom the policy has been pledged or assigned, and except that, subject to the statute of limitations, the amount of any premiums which are recoverable or avoidable by a creditor pursuant to title 44, chapter 8, article 1, with interest, shall inure to their benefit from the cash surrender value. For the purposes of this subsection, "dependent" means a family member who is dependent on the insured for not less than half support.

[StartingOver08]

Great! You have found the answer...good to know in advance of a BK in AZ!

[woeisme]

Great news! Although of course we hope it is unnecessary for a long long time anyhow!

[BKINAZ]

It is...thanks. Though sadly if she goes first I get pretty much nothing. ;) We are changing Life Insurance policies for her...and she took the physical today. (so the 2 yrs kicker comes into play) BUT...she will out live all of us as she hikes like 10 miles every weekend and can do 50 male pushups in a minute. Well...unless a mountain lion...ah...nevermind.

She will out live me by a lifetime. I'm okay with that....

[indebt00]

so life insurance proceeds are protected in AZ? I have proceeds I want to protect....only $10000.
that would be a relief to know they can't touch it.

[BKINAZ]

By what I have read and the insurance lawyers...it looks good. A new law from last year. I am meeting with attorney's on Monday and Tuesday...stay tuned.