If a person files for Bankruptcy, and during the case or shortly after the case closed that person passes away, who gets the life insurance proceeds? Is it the beneficiaries on the policy, or does the money go to the person’s creditors or the Bankruptcy Trustee? Thankfully, the answer to this question is usually pretty straightforward – the proceeds still go to the beneficiaries named in the policy. Those insurance proceeds are not “property of the estate” in the Bankruptcy case and the Trustee or creditors have no legal interest in the money. In cases where the insured person names their “estate” (meaning their probate estate, rather than Bankruptcy estate) as the beneficiary so that their final bills and funeral expenses will be paid off, the money may be administered in the Bankruptcy case or the probate estate, depending on the status of the Bankruptcy case and state law. Again, this is still honoring the wishes of the person when they directed where the money goes.
The general answer presumes that there is a valid insurance policy in place, and premiums have been paid. A Bankruptcy case by the policy-holder can, however, affect the status of insurance policy. If the policy is a term policy, and the premiums are paid during and after the Bankruptcy case (whether Chapter 7 or Chapter 13), the policy should not be affected. If it is a whole-life policy with a cash value, there are different issues. In a Chapter 7 case, the cash value of the policy is almost the same as a bank account in that it can generally be withdrawn. If there are no exemptions to use to protect the money, the Chapter 7 Trustee might withdraw the cash value for creditors. This does not mean the policy is cancelled, but it could affect the amount of proceeds going to the beneficiaries later. The same is true for any loans against the cash value.
If the insured is in a Chapter 13 case, the cash value generally is not withdrawn for the Trustee or creditors, so as long as the premiums are paid and the policy remains in good standing, the beneficiaries will get the proceeds should the person in Bankruptcy pass away during the case and plan period.
Although insurance policies are generally viewed as an appropriate expense for people in Bankruptcy, the reality is that someone cutting expenses might choose to not continue paying the premiums, especially if the beneficiaries are someone other than a spouse or young children. This is something they will discuss with their Bankruptcy lawyer prior to filing their case.
Finally, to be clear, this post discusses the question of who will get insurance proceeds if the insured person is the one filing for Bankruptcy. If the beneficiary of the policy is the person in Bankruptcy, there are other issues that are discussed in this post.