Personal Bankruptcy Doesn’t Mean That You Lose Life Insurance And Annuities
Going through bankruptcy is a riveting experience for anyone. It can send you back to your financial beginnings, become a decade long blight on your credit report and, to outsiders, it always looks like an admission of financial defeat. But the most immediate concern for those who are considering bankruptcy is how it will affect their lifestyle and personal property.
The good news is that most people are able to retain their property and a certain amount of cash value that has accrued within permanent life insurance policies. While bankruptcy courts view the cash value of life insurance policies and personal properties as financial assets, federal law allows a person to preserve certain assets from creditors. To be more specific, you can expect to retain your house and up to $10,775 dollars of an insurance policy’s cash value. Federal bankruptcy code defines what a person can expect to salvage and relinquish after declaring bankruptcy, but it also allows states to set their own guidelines for the retention of assets during bankruptcy. In either case, married couples will be able to double bankruptcy exemptions.
After you decide whether to declare for federal or state bankruptcy exemptions, it’s time to start looking at the financial assets that you want to protect. If you don’t require a real estate exemption to protect your home or don’t need to use the full exemption amount, you can use up to $9,850 toward the protection of other assets, including the cash value of life insurance policies. Bankruptcy courts view life insurance policies and annuities differently than other financial assets considering the nature of the proceeds, which are typically used to preserve family finances in the wake of a breadwinner’s passing. However, some states require that a life insurance policy be in effect for at least two years to qualify for exemptions.
Like preserving the cash value of life insurance policies, preserving the value of annuities involves some fine print as well. Annuities that are part of employer sponsored retirement plans—such as 401(k) plans, certain types of 403(b) annuity plans and death benefit plans—are off limits to creditors. The U.S. Department of labor states that state law cannot usurp federal law concerning these plans. As a general rule: if your employer is contributing to your retirement plan, your retirement plan is protected. However, not all employer-sponsored annuities are bankruptcy exempt. So it’s a good idea to check with your employer about the details of your annuity. And always remember that non-employer-sponsored annuities don’t enjoy the same protection as employer-sponsored annuities. Individual annuities are not without protection, but the laws vary from state to state.
Bankruptcy is often described as a new beginning and, in many ways, it is. Old debts are reduced or canceled out and essential assets such as life insurance, annuities and a person’s house are largely protected. But you should never go into bankruptcy without examining the details of your specific situation. Speaking with a bankruptcy expert is an great first step in planning for your future before declaring bankruptcy.
If you’re thinking about declaring bankruptcy, you probably feel like you’re at the end of your financial rope. Even though bankruptcy significantly reduces or cancels your debts, you can expect to keep your personal dwelling, preserve a portion of the cash value of long-term life insurance and preserve your employer-sponsored retirement plan. For the best life insurance quotes available, visit Insure.com.
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