Is the cash value of a life insurance policy free from creditors if the insured files for bankruptcy?
Bankruptcy is one of the few situations when state law supersedes federal law, so whether your cash value is protected from your creditors depends on the laws of your state. There are provisions in federal law that can protect certain types of property from creditors in bankruptcy cases, but Congress gave each state the right to develop its own rules or to decide that the federal rules are applicable. If federal bankruptcy law is applicable in your state, you can “exempt” up to $8,625 of accumulated cash value from the assets that creditors can claim. Furthermore, if you don’t have or don’t need the full exemption for real estate, you may also be able to protect another $8,000 of cash value from your creditors under federal bankruptcy rules.
