Life Insurance Proceeds in a Bankruptcy

2008-07-09

Ian Schofield

This is not an easy question to answer, although I will try, but I do encourage you to contact us so we can go over the situation in detail, in person.

Person talking on a cellphone looking at spreadsheets on their laptop

The general rule is that life insurance policies are exempt (meaning you would retain the policy in a bankruptcy). However, to the extent a policy has a cash surrender value that can be accessed, that cash surrender value is not exempt and will have to be dealt with in the bankruptcy.

In the scenario you propose, where both you and your wife file bankruptcy, insurance proceeds she receives during the bankruptcy due to your death would also not be exempt (as a general rule) and would flow into the bankruptcy. There is, however, at least one case I am aware from Saskatchewan, and another from Ontario, where this was held to be unfair and the insurance proceeds were at least split between the surviving spouse and the trustee in the particular case.

So I am afraid the answer is not "black and white" and I would want to review the specific circumstances with you in person before commenting further.