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Education/Credentials J.D., University of Arizona 1990. B.A. Economics, California State University, Northridge 1986. For more details please click here
My sister has terminal cancer. She has a life insurance policy which names her husband as beneficiary. They have a mountain of debt, mostly medical but also credit card debt, and they have negative equity in their house.
The question is, should she change the life insurance beneficiary to their children (ages 14 and 16) rather than her husband? Would that shelter the proceeds from creditors, and allow him to file bankruptcy if necessary?
They live in southern California (LA area), they don't know any attorneys, and neither of them has the energy, time, or financial resources to research this. Someone (probably me) needs to tell them what to do.
Any suggestions?
Thanks!
...Steve
ANSWER: Hi Steve. I'm sorry to hear about your sister's circumstances. As simple as your question is, the answer would require a good amount of research, so it's a bit beyond the scope of this free service. I can tell you that the proceeds of the life insurance are exempt to the extent necessary for the support of the surviving debtor and any dependents, so the amount is a critical factor. I'm not sure how or if transferring beneficiaries would change anything and/or whether there would be issues with the transfer. If you give me a couple of days and follow up, I'll try to find a preliminary answer to that.
---------- FOLLOW-UP ----------
QUESTION: Thanks Mark, I'll wait for your followup. The amount of the life insurance is $150,000.
...Steve
Answer The more research I do on this, the more unclear the answer gets. There are a multitude of factors involved, including whether they premiums paid on the policy were made through community property funds or not, and whether it is a term life policy or one of the hybrid types. The bottom line is that there could be consequences for transferring (changing) the beneficiaries, and without doing a significant amount of research (and perhaps not even then) I couldn't advise you as to whether that is a smart option. Most likely what the husband will need to do is keep the proceeds of the insurance in a segregated account and argue that it is all necessary for his (and dependents') maintenance and support, but there is always a risk that a judge will determine he has to give some of it to the Trustee in a bankruptcy.
The other way to go, depending on how long your sister actually survives (sorry, but that's just the reality of the analysis) is to file the bankruptcy case as soon as possible. If she survives for more than 6 months after the bankruptcy case is filed, then there PROBABLY won't be any issue with the life insurance proceeds.
