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Nebraska Court Offers A Reminder: Life Insurance May Be Exempt In Bankruptcy

Annuities, Blogs

Earlier this month, the U.S. Bankruptcy Court for the District of Nebraska issued an opinion that offers a reminder that life insurance policies may be exempt from a bankruptcy estate.

In Re Basler, No. BK10-43471-TJM, 2011 WL 867131 (Bankr. D. Neb. Mar. 10, 2011), involved debtors who had claimed an exemption in life insurance under a Nebraska state statute, Nebraska Revised Statutes § 44-371 (as Nebraska has opted out of using the federal bankruptcy exemptions in favor of its own state exemptions). That statute, in part, says that “all proceeds, cash values, and benefits accruing under an annuity contract, under any policy or certificate of life insurance payable upon the death of the insured to a beneficiary other than the estate of the insured, or under any accident or health insurance policy shall be exempt from attachment, garnishment, or other legal or equitable process and from all claims of creditors of the insured and of the beneficiary if related to the insured by blood or marriage, unless a written assignment to the contrary has been obtained by the claimant.” Neb. Rev. Stat. § 44-371. Additional subsections of the statute put some monetary and temporal limits on the exemption.

The policy was owned by and is a policy on the life of, one of the debtors. A creditor objected to the exemption because, for one, it is owned by only one of the debtors. The court agreed that only the policy owner may claim the exemption, and then turned to the question of the amount of that exemption for that one debtor. 

While the policy benefit was nearly $7 million and the debtor had made a number of premium payments, he also had borrowed money using the policy as collateral and had borrowed from the cash value of the policy, leaving, as of October 2010, cash value of $178,418.13.

The court’s conclusion was that the exemption applied up to $100,000 for the debtor: 

The purpose of the monetary and temporal limitations enacted in § 44-371 is to prevent debtors from loading up on exempt assets such as annuities and life insurance policies in contemplation of bankruptcy at the expense of their creditors. See In re Armstrong,93 B.R. 197, 202 (Bankr.D.Neb.1988) (“[I]n the face of creditor concerns about the abuse of the statutory provision which is being considered in this case, the Nebraska Legislature acted and put a cap upon the amount of an annuity which can be considered as exempt from creditor’s claims. See Neb.Rev.Stat. § 44-371 (Supp.1987).”).

That concern about abusive practices by debtors on the eve of bankruptcy is not an issue with regard to this life insurance policy. The debtor did not attempt to protect cash assets by paying up his premiums and converting them into an exemptible asset; rather, he depleted the cash surrender value of the policy in the months preceding his bankruptcy filing. Therefore, pursuant to Neb.Rev.Stat. § 44-371(1)(b)(i), he may claim an exemption of no more than $100,000 in the unencumbered value of the policy.

In Re Basler,2011 WL 867131. Other states’ statutes concerning exemptions can differ widely, meaning that the exemption may cover greater amounts, lesser amounts, or be inapplicable. Nonetheless, Basler is an example of a situation where life insurance policies may be, at least in part, exempt from the claims of creditors in bankruptcy.