Is Life Insurance Protected in Bankruptcy? Your Essential Guide

How Life Insurance Can Affect Bankruptcy

When you file for bankruptcy, the court doesn’t just look at your debts. It also looks at what you own. This includes your property, your money, and any other assets — even life insurance policies. 

All of this becomes part of your bankruptcy estate, which is a legal term that means everything you legally own when you file.

Why does this matter? Because the bankruptcy trustee reviews your bankruptcy estate to see if there’s anything they can use to help pay your creditors. If something you own has value, like a life insurance policy with cash savings or a payout you recently received, it could affect your case.

Life insurance can come into play in two common ways:

• You own a life insurance policy that has cash value.

• You’re the beneficiary of a policy, and the insured person passes away before or shortly after you file.

To figure out if life insurance might impact your bankruptcy case, the first step is understanding what kind of policy you have and whether it has any current value.

🤔 This is a pretty technical part of the bankruptcy process, so if you’re feeling confused, that’s normal! It may help to speak with an attorney if you have concerns about how life insurance will affect your case. Upsolve can help connect you with an experienced bankruptcy lawyer near you for a free consultation.

Key Terms To Know

Every life insurance policy involves three main people:

• Owner: The person who controls the policy and can make changes

• Insured: The person whose life is covered

• Beneficiary: The person who gets the payout when the insured dies

👥 You might be one or more of these people on a policy. For example, you might own a policy that covers your life and names someone else as the beneficiary.

📚 Another important term is maturity. A life insurance policy is matured when it pays out, usually because the insured has passed away. Until then, it’s unmatured.

What Happens to a Life Insurance Policy in Bankruptcy?

Unmatured life insurance policies (those that haven’t paid out yet) are treated differently depending on whether or not they have a cash value.

Here’s a quick look at the different types of life insurance policies and which have a cash value.

Policies Without Cash Value (Term Life Insurance)

Term life insurance is the most common example of a policy without cash value. It doesn’t build up any savings over time. It just provides a payout if the insured dies during the policy period.

Even though term policies don’t have cash value, you still need to list them on your bankruptcy forms. They’re usually fully protected (exempt) under federal and most state exemption laws, since they don’t have any financial value during your lifetime.

✨ If you use Upsolve’s free Chapter 7 filing tool, it will guide you through the bankruptcy forms and exemptions process.

Policies With Cash Value

Some policies have both an insurance component and a savings component. These include:

• Whole life

• Universal life

• Variable or flexible life

Over time, these policies can build up cash value. This is money you can borrow against or cash out. And it's considered an asset, so it’s part of your bankruptcy estate.

You can check with your insurance company to find out how much cash value your policy has when you’re preparing to file your bankruptcy case. Even if your policy could have a cash value someday, it might be worth $0 right now, especially if you recently borrowed against it.

Can You Keep a Policy With Cash Value?

Many people are able to keep their life insurance policy, even if it has cash value, but this depends on:

• How much cash value the policy has

• Which exemptions you’re using (federal or state)

• Who the insured person is (often you or someone who could claim you as a dependent)

Under the federal exemption laws, you can protect up to $16,850 in cash value, as long as you’re the policy owner and the insured is either you or someone who can claim you as a dependent.

If the cash value is more than $16,850, you may be able to use the federal wildcard exemption as well.

💰 The federal wildcard exemption gives you an additional $1,675 plus up to $15,800 if you don't use the full homestead exemption.

Many states have their own exemption laws that work differently, and not all states let you choose between federal and state exemptions. You can learn more about which exemptions may benefit you most by reading our guide on state versus federal exemptions.

What if You Receive Life Insurance Money After Someone Dies?

If someone passes away and you receive life insurance money as a beneficiary, that payout might affect your bankruptcy case. This largely depends on when you receive the payout.

🗓️ If you become entitled to life insurance proceeds within 180 days (about six months) after filing your bankruptcy case, the money is considered part of your bankruptcy estate.

This means the trustee could use it to pay your creditors unless you can claim it as exempt.

If the insured person dies more than 180 days after you filed, the money you receive is not part of your bankruptcy estate, and the trustee can’t take it.

Even if you haven’t gotten the money yet, the key question is when you became entitled to receive it. That’s usually the date the insured person passed away.

Again, this is a complex topic, so don’t hesitate to set up a free consultation with an experienced bankruptcy attorney if you have questions about your case.

Can You Protect Life Insurance Proceeds?

Under the federal exemption laws, life insurance money you receive as a beneficiary is fully exempt if the following two things are both true:

✅ The person who died could have claimed you as a dependent.

✅ The money is reasonably necessary to support you or your dependents.

What counts as "reasonably necessary" depends on the bankruptcy judge and your situation. You might have to show your monthly expenses or explain why you need the money.

Some state exemptions also protect life insurance proceeds, but often with restrictions. For example, some only protect proceeds from group policies or policies with specific beneficiaries.

If your state doesn’t offer a specific exemption, you might still be able to protect the money using a wildcard or personal property exemption.

💬 If you receive life insurance money after filing your case, it’s important to notify your bankruptcy trustee. Failing to do this can lead to serious consequences, including accusations of bankruptcy fraud.

Can You Get Life Insurance After Bankruptcy?

Filing for bankruptcy doesn’t permanently disqualify you from purchasing life insurance. But it can make the process more difficult in the short term. You may experience:

• Waiting periods

• Higher premiums

• Negative credit score impact

Many insurers require a waiting period after a bankruptcy discharge before approving a new application. For Chapter 7 bankruptcy, this is often 1–2 years after your case is closed. For Chapter 13, you may be able to apply sooner, sometimes even during your repayment plan. But approval can still be more challenging.

Also, insurers may view recent bankruptcy as a sign of increased financial risk. This can result in higher premiums or limited policy options.

Finally, your credit score and overall financial profile are important factors in underwriting. As you rebuild your credit and demonstrate financial stability, your options and rates are likely to improve.

Tips for Keeping or Obtaining Life Insurance After Bankruptcy

If you were able to keep your life insurance policy through bankruptcy, it’s important to maintain your premium payments, review your beneficiaries, and monitor your policy status. If you miss payments, you risk losing coverage. Staying in touch with your insurer can help make sure you stay in good standing.

If you’re trying to get a policy after bankruptcy, here are four tips to follow:

1. Shop around: Different insurers have different guidelines. Compare multiple companies to find the best terms.

2. Be up front: Disclose your bankruptcy honestly on your application. Insurers will check your credit history, so transparency is key.

3. Focus on term life: If affordability is a concern, consider starting with a term life policy. These are usually less expensive and easier to qualify for than permanent policies.

4. Reapply later: As your credit improves and more time passes since your bankruptcy, you may qualify for better rates. Consider reviewing your policy options periodically.

Let’s Summarize…

Life insurance can affect your bankruptcy case if:

• You own a policy with cash value, or

• You receive a payout as a beneficiary within 180 days of filing.

Most term policies are fully protected, and many people can also protect policies with cash value using exemption laws. Whether you get to keep money from a life insurance payout depends on when you became entitled to it and whether you can claim it as exempt.

Because exemption rules vary by state and depend on personal circumstances, consider setting up a free consultation with a bankruptcy attorney if you're unsure how life insurance might affect your case. If you’re looking for a free way to file Chapter 7, you can see if you’re eligible to use Upsolve’s free filing tool.