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Cash value of Life Insurance policy

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  • Cash value of Life Insurance policy

    We received our chapter 7 discharge on May 25, 2010 and our case was closed June 9, 2010. I have a Life Insurance policy that has a decent cash value and a loan against that cash value. We included both in the Bankruptcy , listing the cash value as an exemption and the loan as an unsecured debt. We did not receive any type of notice that these items were removed from the petition or disputed. We have made some changes to the policy to make it more affordable, but have keep it in force. I thought the best case scenario would be that the policy would retain the cash value and the loan removed. The worse case scenario would be to have them repay the loan with the cash value. What I didn't expect was that nothing would happen. The loan is still being listed along with the cash value and I continue to be charged interest on that loan. Has anyone dealt with this issue? What are our options? I did have a short conversation with someone at the Insurance Company who suggested I make copies and send to their legal department for review. We are concerned that if we push the Insurance Company they would cash out and cancel the policy. It is a policy we have had for many years and has a locked in policy rate which is considerably less that what a new policy would cost. I am not sure where to go from here.

    Notdoneyet

  • #2
    What I would do in your case is close out that policy as soon as possible. But not until you purchase yourself some term life.

    In most cases these "cash value" policies are not worth what you could get the same coverage for in a term life policy. Term policy premiums are typically several hundred dollars less per year than the whole life policies. I recommend exploring a term life policy and then invest the difference in a mutual fund that you can control it's destiny, not have some insurance salesman control the destiny of an "investment" that you have to pay interest on to "borrow".

    A con about these policies is when you die (after all that's the reason you have life insurance), the carrier keeps the "cash" portion of the policy. Example, if you have a $500,000 policy that you have $10,000 of cash value in it, your beneficiary will only be paid the $500,000 and the carrier keeps the $10,000. In retrospect, if you have a $500,000 term life policy and you have the difference of what you pay for the whole life invested in a mutual fund (or any other legitimate investment), your beneficiary will receive the $500,000 from the life insurance and you can also leave them the money that's invested.

    Chances are you will never see that cash. If you pay it back you will never see it. If you don't pay it back they charge you interest and deduct what you borrowed (and the interest) upon payment to the beneficiary. So a $500,000 policy with $5,000 borrowed against the cash value and $500 in interest owed your beneficiary will only get $494,500.
    Chapter 7 filed December 11, 2009, 341 Meeting held on January 7, 2010
    Deadline to File a Complaint: March 8, 2010

    Discharged and Closed March 11, 2010

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    • #3
      and... you can also lock in a term life policy for 30 years at the same monthly payment - after that it will go month to month and vary. My husband was able to do this with his policy - it is now locked in until the age of 95. I on the other hand, was not able to do so due to medical issues so I pay mine monthly on an annual renewable term policy that is effective for however long I wish to continue to pay the premium.

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      • #4
        I've had a whole life policy since the mid 1980s, and the cash surrender value that has built up in it has out-performed the mutual funds I have had. One additional consideration is that I will be losing my mutual funds in the bankruptcy, but I am pretty confident that the whole life cash surrender value, which is now a significant amount will be exempt.

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