The two most common types of life insurance are term life insurance and whole life insurance. Term life insurance provides for payment of death benefits if the insured dies during the term of coverage, but it does not accumulate any cash value. Whole life insurance also provides for a death benefit, but it also generally may accumulate cash value which can be used as collateral for a loan.
A term life insurance policy has no value beyond the future death benefit that is payable when the insured dies. As such, term life insurance is exempt from creditors in bankruptcy. The term “exempt” means that creditors cannot seize all or a portion of the asset to pay your debts.
Each state has particular laws governing exemptions. North Carolina law is particularly generous in connection with the cash value of a whole life insurance policy. Thus, the owner of a whole life insurance policy which provides for the death benefits to be payable to spouse and/or children would be able to claim the cash value of the policy as exempt in its totality.
However, this provision only applies if you have lived in North Carolina for a period of two years or more. If you have recently moved into North Carolina, other provisions of the law would apply. You should seek the advice of an experienced bankruptcy attorney if this is your situation.
Although the cash value of your whole life insurance may be a source from which you can borrow money, it may not be advisable to take a loan against a protected asset to pay your debts. Before you borrow against a protected asset, it is in your best interest to consult with an experienced bankruptcy law attorney who can review your overall financial condition, discuss the options that may be available to you, and help you make a decision that best meets your financial goals.
This article is for information purposes only and is not to be considered or substituted as legal advice. The information in this article is based on Federal and North Carolina state laws in effect at the time of posting.