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15.4.1.1 Exemption for Insurance Benefits

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  4. 15.4 Other Assets
  5. 15.4.1 Insurance Benefits and Policies
  6. 15.4.1.1 Exemption for Insurance Benefits

15.4.1.1 Exemption for Insurance Benefits

Almost every state exempts a certain amount of insurance benefits from creditors.235 States vary widely, however, as to both the amount and the scope of their insurance exemptions. Some cap the proceeds or the periodic payment that is exempt.236 Indiana courts, construing the exemption in accordance with a state constitutional requirement of “reasonable” exemptions, hold that only the amount needed to afford the necessities of life is exempt.237 Other state statutes explicitly impose this limitation.238 Life insurance proceeds are usually exempt as to the insured’s debts.239 Some states exempt life insurance proceeds for debts of the beneficiary.240 In other states, the proceeds are non-exempt,241 exempt only if the beneficiary is a specified relative or dependent,242 or exempt as to both the insured’s and the beneficiary’s debts.243

In some states, an exemption for accident, health, or disability benefits has been interpreted to protect uninsured motorist proceeds.244 However, several courts have held that an exemption for accident or disability insurance is not broad enough to protect payments to a personal injury tort plaintiff from the tortfeasor’s insurance.245

Footnotes

  • 235 See, e.g., In re Payne, 323 B.R. 723 (B.A.P. 9th Cir. 2005) (criteria for deciding whether an annuity is exempt life insurance or a non-exempt investment under California law); In re Kennedy, 336 B.R. 600 (B.A.P. 10th Cir. 2005) (table; text available at 2005 WL 2662328) (Colo. Rev. Stat. § 10-7-106 exemption applicable only when life insurance policy or annuities contain anti-alienation provisions); In re Dean, 470 B.R. 643 (Bankr. M.D. Ga. 2012) (Georgia’s bankruptcy-only exemptions, which cap amount of insurance exemption, are exclusive; unlimited exemption found in Insurance Code not applicable in bankruptcy); In re Miller, 370 B.R. 914 (Bankr. D. Minn. 2007) (when couple owned several insurance policies, Minnesota law allows exemption of only one policy per spouse, even though total amount of policies less than exemption cap); In re Ashley, 317 B.R. 352 (Bankr. C.D. Ill. 2004) (history of Illinois’s “convoluted” insurance exemption provisions; allowing widow to exempt proceeds without showing of need); Angell v. Angell, 791 N.W.2d 530 (Minn. 2010) (Servicemembers’ Group Life Insurance benefits are exempt under statute similar to Social Security Anti-Assignment provision and cannot be apportioned by divorce court). But see In re Valentine, 2009 WL 3336081 (Bankr. D.N.H. Oct. 14, 2009) (lump-sum disability insurance settlement not exempt; debtor sought exemption pursuant to N.H. Rev. Stat. Ann. § 167:75, which exempts only public assistance); In re Selfe, 260 B.R. 463 (Bankr. E.D. Mo. 2001) (life insurance not exempt in Missouri). But cf. Milligan v. Trautmen, 496 F.3d 366 (5th Cir. 2007) (Tex. law) (sum received for prepetition surrender and cancellation of insurance policy not exempt); In re Besser, 356 B.R. 531 (Bankr. D. Colo. 2006) (Colorado exempts life insurance but not annuities; statute forbidding beneficiaries to encumber, among other things, benefits in hands of issuer is not an exemption statute, and even if it were would not protect against debts of owner of annuity). See generally Appx. H, infra (summarizing each state’s exemption laws).

  • 236 See, e.g., Mass. Gen. Laws ch. 175, § 110A. See also Liberty Mut. Ins. Co. v. Rosenthal, 204 F. Supp. 2d 140 (D. Mass. 2002) ($400/week cap on disability insurance benefits applies to aggregate amount, not to each policy; debtor with income from four disability policies could exempt $400, not $1600).

  • 237 Citizens Nat’l Bank v. Foster, 668 N.E.2d 1236 (Ind. 1996) (insurance exemption, construed to avoid unconstitutionality, exempts only the amount needed to afford “the necessities of life”; creditor has burden of showing that claimed exemption is unreasonable). See also In re Stinnett, 465 F.3d 309 (7th Cir. 2006) (Indiana exemption for 100% of disability insurance benefits must be construed to exempt only enough to provide “the necessary comforts of life,” as state constitution mandates reasonable exceptions); In re Bannourah, 201 B.R. 954 (Bankr. S.D. Ind. 1996) (state insurance policy exemption, construed so as to avoid state constitutional problem, exempts amount “required to afford the necessities of life”; allowing thirty-eight-year-old widow, with limited earning ability and a four-year-old son, to keep $200,000). See generally § 13.2.5, supra (validity of exemption laws under state constitutions).

  • 238 See, e.g., In re Morehead, 283 F.3d 199 (4th Cir. 2002) (W. Va. law) (payments from private disability insurance policy exempt only as needed for support of debtor); In re Taylor, 523 B.R. 915 (Bankr. S.D. Ga. 2014) (articulating criteria for determining reasonable necessity; allowing exemption of sums needed to bury husband, pay back taxes and second mortgage, plus sum based on court’s prediction of debtor’s future income); In re Walck, 459 B.R. 208 (Bankr. M.D. Pa. 2011) (insurance proceeds reasonably necessary for support of sixty-seven-year-old widow; giving weight to her age and fact that she earned her living by manual labor as a housekeeper; high mortgage payment not unreasonable, when trustee provided no evidence of appropriate alternative housing); In re Tooker, 174 B.R. 33 (Bankr. D. Vt. 1994) (allowing sixty-two-year-old widow to keep entire amount, about $130,000; factors include age, health, earning ability, special needs, other assets); Sanders v. Sanders, 711 A.2d 124 (Me. 1998) (income from disability policy is exempt only insofar as reasonably necessary for debtor’s support); Associated Bank v. Twaiten, 2007 WL 2245756 (Minn. Ct. App. Aug. 7, 2007) (disability insurance exempt so far as needed for “basic necessities” only, not accustomed standard of living; must consider present and future needs, based on age, employment, and general health); J.P. Morgan Case Bank v. Saedi, 2011 WL 683886 (Ohio Ct. App. Feb. 24, 2011) (entire amount of lump-sum settlement with disability insurer exempt; debtor was totally disabled and presented evidence of expenses). But see In re Bird, 288 B.R. 546 (Bankr. C.D. Ill. 2002) (widow could fully exempt proceeds of late husband’s life insurance, regardless of need for support).

  • 239 Plastipak Packaging, Inc. v. DiPasquale, 75 Fed. Appx. 86 (3d Cir. 2003) (Pa. law) (insurance policy naming spouse as beneficiary is exempt as to debts of insured even if purchased with intent to hinder creditors); In re Rudd, 483 B.R. 354 (Bankr. M.D. Ala. 2012) (construing together various sections of Alabama law: insurance on one’s own life for benefit of spouse is exempt as to debts of insured); In re Ladd, 448 B.R. 207 (Bankr. N.D. Ohio 2011) (Ohio insurance exemption protects only against creditors of insured); In re Sims, 421 B.R. 745 (Bankr. D.S.C. 2010) (under South Carolina law, proceeds and cash surrender value of insurance policy payable to beneficiary other than insured’s estate and “for the primary benefit of insured’s spouse” are exempt as to debts of insured, even if insured retains ability to change beneficiary); In re Roberts, 2008 WL 4543038 (Bankr. D. Kan. Oct. 8, 2008) (life insurance benefits exempt from debts of insured); In re Ashley, 317 B.R. 352 (Bankr. C.D. Ill. 2004) (fully exempt as to debts of insured); In re McWhorter, 312 B.R. 695 (Bankr. N.D. Ala. 2004) (proceeds of life insurance policy exempt as to debts of deceased); In re Fick, 249 B.R. 108 (Bankr. W.D.N.C. 2000) (North Carolina exemption for group insurance protects proceeds against creditors of insured); ML Servicing, Inc. v. Coles, 334 P.3d 745 (Ariz. Ct. App. 2014) (life insurance proceeds are exempt in hands of beneficiary from claims of decedent’s creditors, even though policy was purchased with funds misappropriated by now-deceased CEO from his corporation). Cf. In re Romp, 249 B.R. 853 (Bankr. E.D.N.C. 2000) (proceeds of insurance policy are exempt for deceased spouse’s debts, but not exempt for joint debts); Morey v. Everbank, 93 So. 3d 482 (Fla. 2012) (Florida’s insurance exemption makes proceeds exempt as to creditors of estate but, when life insurance was payable to a trust, trust language, setting forth how assets were to be used upon settlor’s death, overrode exemption).

  • 240 In re Erickson, 463 B.R. 142 (B.A.P. 10th Cir. 2011) (Kansas exempts life insurance proceeds as to debts of beneficiary; here, allowing widow to exempt proceeds where joint debtor husband died shortly after filing bankruptcy); In re Gutke, 528 B.R. 798 (Bankr. D. Idaho 2015) (construing poorly drafted statute to conclude that life insurance proceeds are exempt as to debts of beneficiary); In re Rudd, 483 B.R. 354 (Bankr. M.D. Ala. 2012) (construing together various sections of Alabama law; insurance on one’s own life for the benefit of spouse is exempt as to debts of insured; insurance on one’s spouse for one’s own benefit is exempt as to debts of both insured and beneficiary; insurance on spouse’s life for benefit of non-debtor third party is exempt as to debts of beneficiary and insured); In re McCall, 383 B.R. 419 (Bankr. N.D. Ohio 2007) (Ohio exemption for group insurance makes life insurance exempt as to debts of beneficiary—here, surviving spouse). Cf. In re Bordelon, 443 B.R. 725 (Bankr. M.D. La. 2011) (Louisiana exempts insurance proceeds for debts of beneficiary that exist at the time benefits received; here, debt arose later, so proceeds not exempt).

  • 241 Ohio Farmers Ins. Co. v. Special Coatings, L.L.C., 2010 WL 4775630 (M.D. Tenn. Nov. 16, 2010) (Fla. law) (life insurance proceeds not exempt as to debts of beneficiary); In re Roscoe, 2017 WL 2839496 (Bankr. M.D. Fla. June 28, 2017) (insurance proceeds exempt only as to debts of deceased; non-exempt as to joint debts of deceased and surviving spouse); In re Ladd, 448 B.R. 207 (Bankr. N.D. Ohio 2011) (Ohio insurance exemption protects only against creditors of insured); In re McWhorter, 312 B.R. 695 (Bankr. N.D. Ala. 2004) (proceeds of life insurance policy exempt as to debts of deceased but not those of beneficiary); In re Fick, 249 B.R. 108 (Bankr. W.D.N.C. 2000) (North Carolina exemption for group insurance protects proceeds against creditors of insured but not against creditors of beneficiary); Blanton v. Clark, 2002 WL 709958 (Ohio Ct. App. Apr. 19, 2002) (proceeds of deceased spouse’s life insurance may be garnished for joint debts or for debts of surviving spouse).

  • 242 In re Naranjo, 590 B.R. 126 (Bankr. E.D. Va. 2018) (Virginia exempts life insurance proceeds if beneficiary is a dependent of insured, but statute does not define the term “dependent”; allowing exemption to daughter who became full-time caregiver to the insured, resided with him in a house for which he paid most of the expenses, and had previously relied on substantial assistance from him during periods of financial hardship); In re DeMarco, 491 B.R. 236 (Bankr. W.D. Tenn. 2013) (exempt only as to debts of insured, and only if beneficiary is spouse, child, or dependent relative).

  • 243 See, e.g., In re Stilwell, 321 B.R. 471 (C.D. Ill. 2005) (applying principle of liberal construction and holding that proceeds of deceased spouse’s life insurance are fully exempt as to debts of both the insured and the beneficiary); In re Fadeley, 2011 WL 350508 (Bankr. W.D.N.C. Feb. 1, 2011) (proceeds of group life insurance exempt as to debts of insured or beneficiary; construing ambiguous language in uniform statute); In re Fahey, 352 B.R. 288 (Bankr. D. Colo. 2006) (proceeds of group life insurance exempt as to debts of both insured and beneficiary; note that this is more favorable than Colorado’s treatment of individual life insurance); In re Lewis, 327 B.R. 645 (Bankr. S.D. Ohio 2005) (proceeds of employee’s group insurance policy, payable to beneficiary who is actually dependent on employee, exempt both before and after payment, as to debts of the insured or beneficiary); In re Ashley, 317 B.R. 352 (Bankr. C.D. Ill. 2004) (fully exempt as to debts of the insured and beneficiary; allowing widow to exempt proceeds without showing of need); In re Kleinman, 272 B.R. 339 (Bankr. D. Md. 2001) (proceeds of life insurance protected from creditors of deceased spouse and those of beneficiary); MidFirst Bank v. Barness, 2014 WL 6456046 (Ariz. Ct. App. Nov. 18, 2014) (proceeds of policy paid to trust—of which debtor’s wife was beneficiary—exempt as to debts of both deceased and widow); Carts & Parts, Inc. v. Rosales, 225 P.3d 1 (Okla. Civ. App. 2009) (Oklahoma exemption broadly protects life insurance proceeds from any “legal or equitable process or operation of law to pay any debt or liability of the insured or the beneficiary”; here, an attempt by deceased wife’s employer to obtain a constructive trust on property allegedly paid for by wife’s embezzlement). See also In re Roberts, 2008 WL 4543038 (Bankr. D. Kan. Oct. 8, 2008) (life insurance benefits exempt from debts of insured or beneficiary under Kansas law in hands of “any person named as a beneficiary in a policy of insurance”; father, the debtor, was “named” when deceased son failed to choose beneficiary, as policy specified order in which family members would receive benefits if other beneficiary not chosen).

  • 244 See, e.g., In re Reeves, 521 B.R. 827 (Bankr. E.D. Tenn. 2014) (state accident insurance exemption covers uninsured/underinsured motorist coverage and can be stacked with wildcard and personal injury exemptions); In re Thompkins, 263 B.R. 223 (Bankr. W.D. Tenn. 2001) (also holding that cap for personal injury judgments does not apply); In re Portal, 45 P.3d 891 (N.M. 2002) (uninsured motorist policy is “accident” policy within meaning of New Mexico exemption for “payments of every kind from any life, accident, or health insurance policy”). But see In re Bellisari, 554 B.R. 440 (Bankr. S.D. Ohio 2016) (denying exemption for annuity purchased to fund settlement of uninsured motorist claim; annuity payments were proceeds of an insurance policy, but Ohio exemption for accident or health insurance does not cover motor vehicle insurance).

  • 245 Kollar v. Miller, 176 F.3d 175 (3d Cir. 1999) (tort judgment does not fall within Pennsylvania exemption for amount payable under a policy of accident or disability insurance even if judgment will be paid from tortfeasor’s insurance); In re Chesley, 526 B.R. 888 (M.D. Fla. 2014) (unallocated settlement proceeds from accident that rendered debtor disabled not exempt; funds came from at-fault driver’s liability insurance); In re Jackson, 2007 WL 4179849 (Bankr. N.D. Iowa Nov. 21, 2007) (Iowa exempts indemnity or benefit only “as to the insured”).