Cashing in Life Insurance

[anonymuse]

The only way it appears that I'm going to get the money to file with a lawyer is by cashing in my life insurance policy. ($3800--which is more than I need). I'm trying to get in touch with my lawyer (who I haven't contacted in awhile), but something happened today that is stressing me out about this.

I have a bunch of questions:

1) I have the option of cashing it out OR taking some out (as in a loan). They say its not really considered a loan, but it is there to pay back OR its deducted from the final value of my insurance policy at the end. In the case of a bankruptcy, do they consider this a loan?

2) Does money I take out contribute to my past 6 month earnings?

3) Of lesser importance, is this money taxable?

[emoney]

One thing in my plan was to convert whole life to term life insurance. Whole life in every case I have looked at is a rip-off. Only do this after the new term policy has been issued.
regards,
emoney

[anonymuse]

I'm not trying to do a conversion--I need the cash to pay for a lawyer for bankruptcy.

[jp2861]

I think you'll regret touching your life insurance. It will cost you a ton more to replace the policy. If you just take a loan against it you'll have to pay it back with interest. If you don't pay the loan back the accrued interest will keep eating away at your death benefit. I would do whatever I could to stay away from touching the policy. Depending the integrity of your lawyer, they may tell you to tap into it just so they get paid. I wouldn't touch it.

[CindyLou]

It would be counted as income if you cash it out.

[Lindsay]

We had a friend who filed for bankruptcy and the trustee actually took his life insurance money. He told me that he told the trustee that money was to bury him with (he's 70) and the trustee didn't care! I'm not sure if life insurance policies are treated as exemptions or if he had a certain type that was considered an asset. This happened in NY.

[ameliabedilia]

How difficult do you feel your case is? With the amount of posts here, you might be considered an expert .

Have you thought about pro se? I know it's not for everyone, but we had NO money when we filed and I was not willing to deal with our 8 accounts going to collection agencies, judgements etc, so I took the chance and we went alone. Everything turned out perfectly- textbook case !

[jp2861]

We had a friend who filed for bankruptcy and the trustee actually took his life insurance money. He told me that he told the trustee that money was to bury him with (he's 70) and the trustee didn't care! I'm not sure if life insurance policies are treated as exemptions or if he had a certain type that was considered an asset. This happened in NY.

Mine was listed as asett and then claimed as an exemption.

[wellspring]

Not sure if this helps but I have a life insurance policy that I took a loan out against maybe 5 years ago. Never paid anything back, but intend to now that my finances are getting back on track.
When I filed my chapter 7, my attorney listed my policy on Schedule B as an asset and then exempted it. I also needed to bring in a copy of verification of coverage which listed the beneficiaries. I called the insurance company and they mailed me the VOC. When I looked at it, it listed my coverage, beneficiaries, accumulation value, and the outstanding loan balance. So I would say it was viewed as a loan by the bankruptcy court. It was never questioned by the Trustee and believe me, I had a tough one!

I never received anything from the life insurance company come income tax time for the loan, so I'm assuming the loan isn't considered taxable. I did however cash one policy in and I received a form from that insurance company that I had to include in my income taxes. So if you cash it in, it's considered income. Hope this helps!