L45) Exemption for Life Insurance Cash Value from Claims of Policyowner’s Creditors

The following is some research I have done on how protected our life insurance policies are from Bankruptcy, Judgements and Creditors.

here is a great quick reference chart to begin with: http://www.assetprotectionsociety.org/wp-content/uploads/2013/07/50-State-Creditor-Exempt-Asset-Chart-2013.pdf

Below find some other info. to further your research within your own state.

From LegalConsumer.com

Virtually all states protect life insurance proceeds in some manner or another. Some restrict it to proceeds paid to a dependent. Many states also protect the cash-value or loan-value of insurance policies.

If a substantial amount of your assets are in life insurance, you may want to consult a professional to determine the extent to which those policies are exempt. The website AssetProtectionBook.com does particularly thorough job of covering Pennsylvania insurance exemptions.


The following chart lists the four major exemptions that are a concern in asset protection planning:

(1) The Exemption for Tax-Qualified Retirement Plans, IRAs & Roth IRAs

(2) The Homestead Exemption

(3) The Exemption for Life Insurance Cash Value from Claims of Policyowner’s Creditors

(4) The Exemption for (Non-IRA / Non-ERISA) Annuity Cash Value and Payments from Claims of Owner’s Creditors

This list is not comprehensive, and is not current — we only keep it up as time allows and other planners advise us about changes in their state’s laws. The important point is that the following should only be used as a starting point for research, and certainly not as dispositive on any point.

Exemptions are complicated, and even if the statute says one thing there may be a significant court opinion that creates a large exception. Thus, exemptions must be individually researched in each and every planning situation.

Click link below for more information



Insurance Exemption Glossary:

Insurance exemptions use a lingo all their own and some familiarity with the jargon is essential to understanding what is exempt.

Three kinds of insurance assets

You may own a property interest in life insurance in three different ways: you may own an unmatured life insurance contract (with no cash value – e.g. a term life insurance policy), you may own cash value in an unmatured life insurance policy (e.g. a whole life policy), and you may, as a beneficiary, be entitled to proceeds from a matured life insurance policy.

Matured” simply means that the conditions of the policy have been met. A matured policy is paying proceeds to the beneficiary of the insured.

An unmatured policy is not paying proceeds, but, can still have a current value in two ways:

1. In the case of a “term life” policy, the continued existence of the contract itself can be said to have value, even if it cannot be converted to cash.

2. Other kinds of of policies can have a accumulative value over time, and that value that can be borrowed against, or turned into cash if the policy is ‘surrendered’ (see “avails” below).

Reading insurance exemptions

Many states have unlimited exemptions for insurance proceeds. However, most states offer only limited exemptions for the cash or loan value of an unmatured policy.

A few states, however, offer unlimited exemptions for the cash value of such policies, or policies offered by ‘fraternal benefit societies.’ In such states, life insurance is often an important component of an overall asset protection strategy.

Other terms

Avails: Any amount available to the owner of an insurance policy other than the actual proceeds of the policy. Avails include dividend payments, interest, cash or surrender value (the money you’d get if you sold your policy back to the insurance company) and loan value (the amount of cash you can borrow against the policy).



(xi) the proceeds or benefits of any life insurance contracts or policies paid or payable to the debtor or any trust of which the debtor is a beneficiary upon the death of the spouse or children of the debtor, provided that the contract or policy has been owned by the debtor for a continuous unexpired period of one year;

            (xii) the proceeds or benefits of any life insurance contracts or policies paid or payable to the spouse or children of the debtor or any trust of which the spouse or children are beneficiaries upon the death of the debtor, provided that the contract or policy has been in existence for a continuous unexpired period of one year;

            (xiii) proceeds and avails of any unmatured life insurance contracts owned by the debtor or any revocable grantor trust created by the debtor, excluding any payments made on the contract during the one year immediately preceding a creditor’s levy or execution;


New York

 3. All trusts, custodial  accounts,  annuities,  insurance  contracts,
  monies,  assets,  or  interests  described  in  paragraph  two  of  this
  subdivision shall be conclusively  presumed  to  be  spendthrift  trusts
  under  this  section and the common law of the state of New York for all
  purposes, including, but not limited to,  all  cases  arising  under  or
  related  to  a  case  arising under sections one hundred one to thirteen
  hundred thirty of title eleven of the United States Bankruptcy Code,  as

 1.  ninety  per  cent of the income or other payments from a trust the
  principal of which is exempt under subdivision (c);  provided,  however,
  that  with respect to any income or payments made from trusts, custodial
  accounts, annuities, insurance contracts,  monies,  assets  or  interest
  established  as part of an individual retirement account plan or as part
  of a Keogh (HR-10), retirement or other plan described in paragraph  two
  of  subdivision  (c)  of this section, the exception in this subdivision
  for such part as a court determines to be unnecessary for the reasonable
  requirements of the judgment debtor and his dependents shall not  apply,
  and  the  ninety  percent exclusion of this paragraph shall become a one
  hundred percent exclusion;

 (i) Exemption for life insurance policies. The  right  of  a  judgment
  debtor  to  accelerate  payment  of  part or all of the death benefit or
  special surrender value under a life insurance policy, as authorized  by
  paragraph  one  of  subsection  (a)  of section one thousand one hundred
  thirteen of the insurance law, or to enter into  a  viatical  settlement
  pursuant  to  the  provisions  of article seventy-eight of the insurance
  law, is exempt from application to the satisfaction of a money judgment.



(d) The following property may be exempted under subsection (b)(2) of this section:

(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 $8,000 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.



(3)  Any policy or contract of insurance or annuity
        issued to a solvent insured who is the beneficiary thereof,
        except any part thereof exceeding an income or return of $100
        per month.
(4)  Any amount of proceeds retained by the insurer at
        maturity or otherwise under the terms of an annuity or policy
        of life insurance if the policy or a supplemental agreement
        provides that such proceeds and the income therefrom shall
        not be assignable
(5)  Any policy of group insurance or the proceeds
(6)  The net amount payable under any annuity contract or
        policy of life insurance made for the benefit of or assigned
        to the spouse, children or dependent relative of the insured,
        whether or not the right to change the named beneficiary is
        reserved by or permitted to the insured. The preceding
        sentence shall not be applicable to the extent the judgment
        debtor is such spouse, child or other relative.


March 4, 2014 · Jennifer · No Comments
Tags: ,  · Posted in: CLIENT LESSONS, L45) Exemption for Life Insurance

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