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15.4.1.3 Is the Policy Itself Exempt?

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  6. 15.4.1.3 Is the Policy Itself Exempt?

15.4.1.3 Is the Policy Itself Exempt?

Another question is whether the policy itself is exempt. Many states exempt the cash value of a life insurance policy, at least when a close family member is the beneficiary,252 though this rule is far from universal.253 North Carolina exempts a policy only if it is “for the sole use and benefit” of the insured’s spouse or children.254 Some Texas courts hold that the cash value of life insurance policies exempted by the state Insurance Code is not subject to the cap on exempt property in the Property Code.255

Courts have reached differing results—even when construing identical language—on the question of whether a debtor may exempt the cash value of an insurance policy that is payable to close relatives, such as parents or adult children who are not dependent on the debtor.256 One court that allowed the exemption noted society’s interest in encouraging adult children to take care of their elderly parents and in alleviating the financial burdens that a parent’s death may place on adult children.257 A court rejected a claim that a statute exempting the cash surrender value of insurance taken out “for the benefit of” not only certain listed relatives but also any “creditor” protected a policy when the beneficiary was a relative who was not listed but had recently made a loan to the debtor. The court held that the term referred only to those who were creditors at the time the policy was purchased.258

Footnotes

  • 252 Milligan v. Trautmen, 496 F.3d 366 (5th Cir. 2007) (Tex. law) (cash value of existing policy exempt, but not sum received for prepetition surrender and cancellation of policy); In re Vigil, 2003 WL 22024830 (10th Cir. Aug. 26, 2003) (insured may exempt cash surrender value of life insurance policy); Soc’y of Lloyd’s v. Collins, 284 F.3d 727 (7th Cir. 2002) (life insurance policy of which spouse was beneficiary exempt under Illinois law, even as to premium payments made after debt accrued, when no showing of fraudulent intent); Equal Emp’t Opportunity Comm’n v. 5042 Holdings Ltd., 2013 WL 1636577 (N.D. W. Va. Apr. 16, 2013) (cash surrender value of life insurance policy is exempt under D.C. law); In re Bowman, 582 B.R. 899 (Bankr. E.D. Va. 2018) (reconciling two arguably inconsistent provisions of Virginia law to conclude that cash value of policy is exempt even if insured has the right to change beneficiary); In re Volk, 571 B.R. 510 (Bankr. D. Mass. 2017) (Massachusetts exempts life insurance policy if the beneficiary has an insurable interest in insured’s life; shown here where policy payable to trust, the beneficiaries of which were debtor’s adult sons and daughters); In re Zerbi, 2011 WL 175923 (Bankr. W.D. Mich. Jan. 6, 2011) (under federal bankruptcy exemptions, debtor can be required to turn over non-exempt portion of cash value of insurance, even if this means he must surrender the policy); In re Sims, 421 B.R. 745 (Bankr. D.S.C. 2010) (cash surrender value exempt if statutory criteria are met); In re Shethi, 389 B.R. 588 (Bankr. N.D. Ill. 2008) (cash surrender value exempt, even if payable to insured, if the beneficiaries are within the class of family members listed in statute); In re Levesque, 2008 WL 3893705 (Bankr. D. Mass. Aug. 21, 2008) (if beneficiary is the one named when policy was purchased, cash surrender value is exempt; allowing exemption because beneficiary never changed); In re Rice, 2006 WL 2051842 (Bankr. M.D.N.C. June 21, 2006) (exemption for “money or other benefit” provided by fraternal benefit association protects cash surrender value of life insurance policy issued by such association); In re Trautman, 296 B.R. 651 (Bankr. W.D.N.Y. 2003) (mother and daughter’s reciprocal life insurance policies both wholly exempt when both filed bankruptcy; beneficiary had “mere expectancy” that was not part of estate); In re Johnson, 274 B.R. 473 (Bankr. E.D. Mich. 2002) (Michigan statute explicitly exempts cash surrender value of debtor’s life insurance if spouse or children are beneficiaries); In re Davis, 275 B.R. 134 (Bankr. D.D.C. 2002) (District of Columbia law permits debtor to exempt cash surrender value of policy on their life if spouse, children, or dependents are beneficiaries; cash surrender value is an exempt “proceed or avail” of the policy); Tech. Chems. & Prods., Inc. v. Porchester Holdings, Inc., 785 So. 2d 636 (Fla. 2001) (cash surrender value of whole life or limited whole life insurance policies fully exempt under Florida statute); DC Mex Holdings, L.L.C. v. Affordable Land, L.L.C., 907 N.W.2d 611 (Mich. Ct. App. 2017) (interpreting ambiguous Michigan statute to exempt value of life insurance policy during insured’s lifetime as long as beneficiary of policy is insured’s spouse or child, or a trustee for their benefit). See also In re Moosman, 2013 WL 4460001 (D. Colo. Aug. 20, 2013) (Colorado exemption for cash surrender value excepts increases in value attributable to payments made during forty-eight months before bankruptcy). Cf. McFarland v. Wallace, 790 F.3d 1182 (11th Cir. 2015) (Georgia’s bankruptcy-only exemption for $2000 for cash surrender value of insurance policy is more specific than provision of insurance law exempting entire amount; allowing only $2000 exemption); In re Sloss, 279 B.R. 6 (Bankr. D. Mass. 2002) (exemption for insurance policy lost when divorce decree made wife, formerly the beneficiary, trustee for the children); In re Oxford, 274 B.R. 887 (Bankr. D. Idaho 2002) (unlimited exemption for unmatured life insurance policy merely allows debtor to keep the policy; limited exemption for loan value applies cap to the aggregate of all policies, not to each separate policy). But cf. Dowling v. Chicago Options Assocs., Inc., 847 N.E.2d 741 (Ill. App. Ct. 2006) (Illinois exemption for policy payable to spouse or dependents applies only if policy payable to natural person; no exemption for policy payable to trust that would distribute proceeds to minor children).

  • 253 See, e.g., In re McFarland, 481 B.R. 242 (Bankr. S.D. Ga. 2012) (Georgia insurance exemption does not protect the cash surrender value of whole life insurance policy); In re Sims, 421 B.R. 745 (Bankr. D.S.C. 2010) (surrender value not exempt); In re Lowery, 272 B.R. 317 (Bankr. M.D. Fla. 2001) (cash surrender value not exempt when policy insures one spouse but is owned by the other); In re Jacobs, 264 B.R. 274 (Bankr. W.D.N.Y. 2001) (married debtors could not exempt cash surrender value of life insurance policies on each other’s lives); In re Watkins, 267 B.R. 703 (Bankr. E.D. Va. 2001) (Virginia’s unlimited exemption for life insurance proceeds, which protects beneficiary but not insured, does not protect cash surrender value, but homestead exemption may apply); Flatau v. Waggoner (In re Waggoner), 244 B.R. 492 (Bankr. M.D. Ga. 2000) (debtor may exempt unmatured life insurance policy itself but may not exempt its cash value); Schenk Boncher & Prasher v. Vanderlaan, 2003 WL 22026405 (Mich. Ct. App. Aug. 28, 2003) (surrender value of policy not exempt; debtor may be ordered to surrender policy and pay proceeds to judgment creditor). See also Marriage of Gedgaunas, 978 P.2d 677 (Colo. App. 1999) (creditor ex-wife could garnish so much of cash value of life insurance as was attributable to premium payments made during previous 24 months). Cf. Plastipak Packaging, Inc. v. DiPasquale, 75 Fed. Appx. 86 (3d Cir. 2003) (Pa. law) (funds borrowed from policy by insured not exempt because not being held for benefit of beneficiary).

  • 254 In re Forgione, 2014 WL 4549004 (Bankr. M.D.N.C. Sept. 12, 2014) (North Carolina exempts life insurance but only if beneficiaries are spouse or children; debtor cannot exempt any part of policy when one of beneficiaries is ex-wife).

  • 255 In re Atkins, 217 B.R. 522 (Bankr. E.D. Tex. 1997) (insurance code allows exemption of entire amount of annuity, without regard to the personal property cap); In re Borchers, 192 B.R. 698 (Bankr. W.D. Tex. 1996) (not included in cap). But see In re Scott, 193 B.R. 805 (Bankr. N.D. Tex. 1996) (insurance policy is included in the cap).

  • 256 DEPENDENCY MUST BE SHOWN: In re Hardesty, 2015 WL 4719340 (Bankr. N.D. Ill. Aug. 7, 2015) (benefits payable to “spouse, child . . . or other persons dependent”); In re Maggard, 2013 WL 1337306 (Bankr. N.D. Iowa Apr. 1, 2013) (dependency must be shown, but allowing exemption of policy benefitting non-dependent parents when debtors and parents testified that proceeds were to be used for care of debtors’ minor children); In re Bunting, 322 B.R. 852 (Bankr. C.D. Ill. 2005) (proceeds of mother’s insurance policy not exempt in hands of non-dependent adult son; only a spouse may exempt without showing of dependency); In re Bunnell, 322 B.R. 331 (Bankr. N.D. Ohio 2005) (life insurance policy not exempt under Ohio law when beneficiary not a dependent); In re Peacock, 292 B.R. 593 (Bankr. S.D. Ohio 2002) (Ohio exempts policy payable to “dependent” of debtor; not exempt when beneficiaries, debtor’s elderly mother and aunt, neither lived with debtor nor depended on her for income or personal services); In re Grace, 273 B.R. 570 (Bankr. S.D. Ill. 2002) (dependents only, but twenty-year-old college student whose mother was subsidizing his education and some other expenses is a dependent); In re Sommer, 228 B.R. 674 (Bankr. C.D. Ill. 1998) (adult son may exempt insurance on his life, for which his parents are beneficiaries, only if parents are dependent on him); People ex rel. Dir. of Corr. v. Ruckman, 843 N.E.2d 882 (Ill. App. Ct. 2005) (prison inmate could not exempt proceeds of deceased mother’s life insurance because he was not mother’s dependent). See also In re Rief, 2008 WL 168951 (D. Md. Jan. 15, 2008) (exemption for insurance policy of which spouse, children, or dependents were beneficiaries did not cover policy payable to debtor’s estate, of which spouse and children were beneficiaries, because they were not beneficiaries of policy; children’s life insurance policies not exempt; debtor was neither insured nor dependent of insured); In re Glimcher, 458 B.R. 544 (Bankr. D. Ariz. 2011) (exemption for policy payable to, inter alia, a spouse, did not protect policy, mandated by divorce decree, payable to ex-spouse; even if it did, dependency must be shown).

    DEPENDENCY NEED NOT BE SHOWN: In re Spears, 2014 WL 295172 (Bankr. N.D. Ind. Jan. 9, 2014) (dependency need not be shown if beneficiary is spouse or child of insured); In re Frederick, 495 B.R. 813 (Bankr. N.D. Ohio 2013) (dependency requirement does not apply to group policy; policy obtained as a group policy remained so when insured retired and took “portability option”); In re Wandrey, 334 B.R. 427 (Bankr. N.D. Ind. 2005) (dependency not required to claim life insurance policy as exempt); In re Bush, 253 B.R. 863 (Bankr. S.D. Ohio 2000) (to claim Ohio exemption, debtor need only show that beneficiaries were her children, not that they were dependent, but result might be different if this were an effort to shelter a substantial inheritance); In re Romp, 249 B.R. 853 (Bankr. E.D.N.C. 2000) (insurance policies, the beneficiaries of which are debtor’s adult, non-dependent offspring, are exempt); In re Shaffer, 228 B.R. 892 (Bankr. N.D. Ohio 1998) (Ohio exemption for insurance policies payable to “the spouse or children, or any persons dependent on” debtor allowed debtor to exempt cash surrender value of policy when beneficiary was his adult, non-dependent, son); In re Howell, 27 N.E.3d 723 (Ind. 2015) (“spouse, children or any relative dependent upon” debtor; construing statute to avoid surplusage: spouses and children are always relatives, so enumeration would not be necessary if they were covered by “any relative”).

  • 257 In re Shaffer, 228 B.R. 892 (Bankr. N.D. Ohio 1998).

  • 258 In re Falter, 2013 WL 211294 (Bankr. N.D. Ohio Jan. 18, 2013) (not exempt when policy, of which parents were beneficiaries, had been owned for many years, and debtor had only recently borrowed from parents).