Bankruptcy judge unearths useful exemptions for life insurance policies

You can lean a lot from reading the latest bankruptcy opinions.

About bankruptcy law, to be sure, but often also about little explored areas of state laws.

Take life insurance, for an example.

Term life insurance — the kind that simply pays a benefit when someone dies. Except in the case of a suicide, of course, which was so memorably the undoing of D. O. Guerrero (played by Van Heflin) in the 1970 melodrama Airport (left). Term life insurance is easy to deal with in a bankruptcy case; it’s completely exempt from attachment or surrender. However, it’s not a very exciting asset — you can’t really enjoy it unless you’re dead!

“Whole” life policies, on the other hand, are a different beast. In addition to the death benefit, they accrue cash value as long as the premiums are paid, making them essentially a type of investment or savings vehicle. Bankruptcy trustees love to seize whole life policies. Why wouldn’t they? They are as good as cash, and a lot easier to liquidate compared to, say, towing a used car across the state.

But in the bankruptcy case of Chung-I Liang and Yu-Chi Chao (a married couple), Massachusetts bankruptcy judge Melvin Hoffman unearthed a couple of potential strategies for exempting whole life policies.

First, debtors may be able to take advantage of Massachusetts General Law chapter 175, section 125; under this law whole life policies can be protected, so long as the person who bought the policy is not also the beneficiary, according to Judge Hoffman.

A somewhat related law is found next door in Chapter 175, section 126. This one covers married women only, and appears to have originated as a type of social benefit back in the 1840’s. According to Judge Hoffman’s ruling in the Liang case, if a married woman takes out a whole life policy and the person whose life is insured is her husband, that policy can be protected in bankruptcy as well.

If you have been thinking about bankruptcy and have some life insurance policies tucked away in a drawer, get them out, figure out what kind of policies they are, and then run through the above who’s who list (who bought the policy, who has to die for it to pay off, and who collects when the death occurs) to figure out if the policy is one you can keep, even after a bankruptcy case.


By Doug Beaton

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