Are There Any Federal Bankruptcy Insurance Exemptions?

There are two main federal bankruptcy exemptions for “unmatured” insurance contracts; 11 U.S.C. § 522(d)(7) and (d)(8):

(7) Any unmatured life insurance contract owned by the debtor, other than a credit life insurance contract.

(8) The debtor’s aggregate interest, not to exceed in value $11,525 less any amount of property of the estate transferred in the manner specified in section 542(d) of this title, in any accrued dividend or interest under, or loan value of, any unmatured life insurance contract owned by the debtor under which the insured is the debtor or an individual of whom the debtor is a dependent.

So, what’s the bottom line of these exemptions? First, an unmatured life insurance contract is one in which the insured person hasn’t died yet. These insurance exemptions have at times provoked controversy, but the gist is that subsection 7 protects the basic insurance contract, i.e. the right to receive proceeds on the death of the insured. Consequently, it is a good idea to claim an exemption in any term life policy under this subsection so that if the insured dies within a period which would give the bankruptcy estate an interest in the proceeds-for example, in the 180 days after the filing of the petition-these proceeds would be exempted without need to resort to the alternative exemption for life insurance proceeds under subsection 11 of Section 522 (which includes a reasonableness cap). Similarly, the basic insurance contract of a whole life situation should also be exempted with subsection 7, but since a whole life policy has an additional facet to them, a savings or cash surrender value, this additional value is addressed in subsection 8.

Subsection 8 provides an exemption for this cash value but a monetary cap of the amount that can be exempted in bankruptcy. It is important to note that, depending on the other property of the debtor, it may be possible to exempt additional value under the “wildcard” exemption, but the current $12,250 is the only insurance-specific exemption for whole life cash value.