Exemption of life insurance in bankruptcy

A recent Fifth Circuit Court of Appeals decision involved the intersection of federal bankruptcy law and Texas law regarding ownership of a life insurance policy. The court determined that the insured and the beneficiaries of life-insurance policies can claim the cash surrender value of those policies as exempt.

The claimed bankruptcy exemption for life insurance policies

The Gordons, after filing for Chapter 7 bankruptcy, sought to exempt the surrender value of two life-insurance policies under Texas state law. The Trustee of their bankruptcy estate contested this exemption. His argument hinged on the distinction between the roles of 'owners' and 'insured' or 'beneficiary' of the policies. The bankruptcy court overruled his objection, a decision later affirmed by the district court. The matter escalated to the United States Court of Appeals, Fifth Circuit.

The claimed life insurance exemption upheld

The Court of Appeals reviewed the case de novo, focusing on the interpretation of the Texas Insurance Code § 1108.051. This statute explicitly provides exemptions for benefits, including the cash value of life-insurance policies, for the insured or beneficiary. The trustee’s objection was based on the contention that the Gordons, as 'owners' of the policies, were not eligible for this exemption.

The Court rejected this argument. It found that since the policies named the Gordons as both insured and beneficiaries, they were entitled to claim the cash surrender value as exempt. The Court emphasized the importance of the statute's plain language and its legislative history, which consistently protected such benefits from bankruptcy claims since 1927.

Protecting your interests in life insurance

This ruling emphasizes the protections offered life insurance policies in bankruptcy court. In Texas, the insured or beneficiary of a life insurance policy can exempt its cash surrender value in bankruptcy proceedings. This aligns with the Texas legal principle that exemption laws should be liberally construed in favor of claimants.

This case highlights the importance of how life insurance policies are structured and the roles of the insured and beneficiaries. Our life insurance legal team can provide guidance on how these factors impact your rights to disputed life insurance benefits. We are dedicated to helping clients navigate life insurance disputes with expertise and personalized attention.