Rights of Creditors to Life-insurance Policies

The National Bankruptcy Act expressly permits a bankrupt, having a policy with a cash surrender value payable to himself, his estate or his legal representatives, to keep the policy free from the claims of creditors by paying such surrender value to the trustee within thirty days after the ascertainment of the amount. 1 Failure to do this, causes the policy to pass to the trustee as assets for the benefit of creditors. But if the policy has no surrender value, the courts have held that the trustee has no interest therein. In Morris v. Dobb, trustee (110 Ga. 606), where a husband took out a policy payable to his legal representatives and subsequently transferred the same to his wife four months prior to the filing of a petition in bankruptcy, the court held: "A policy of insurance on the life of a bankrupt which has no cash surrender value, and no value for any purpose except the contingency of its being valuable at the death of the bankrupt if the premiums are kept paid, does not vest in the trustee as assets of the estate". Moreover, the courts have held that a state statute protecting certain beneficiaries against the claims of creditors takes precedence over the Rational Bankruptcy Act. Thus, in Holden v. Stratton, (198 U, S. 202) the court ruled that: "Policies of insurance which are exempt under the law of the state of the bankrupt are exempt under Section 6 of the Bankruptcy Act of 1898, even though they are endowment policies payable to the assured during his lifetime and have cash surrender values, and the provisions of Section 70 (a) of the Act do not apply to policies which are exempt under the state law. It has always been the policy of Congress, both in general legislation and in bankrupt acts to recognize and give effect to exemption laws of the states". Following the payment of the policy to the beneficiary, however, the proceeds are subject to levy and attachment for such beneficiary's debts, just as any ordinary assets would be.

Some courts have also emphasized the right and duty of an insolvent, in the absence of actual fraud, to make moderate provision for his wife and children by naming them as beneficiaries in a life-insurance policy. This is clearly indicated in the opinion rendered in Central Bank of Washington v. Hume (128 U. S. 195), where "a married man," it was declared, "may rightfully devote a moderate portion of his earnings to insure his life, and thus make reasonable provision for his family after his decease, without being thereby held to intend to hinder, delay or defraud his creditors, provided no such fraudulent intent is shown to exist, or must be necessarily inferred from the surrounding circumstances." But on this point the courts are by no means a unit. Some hold that the premiums paid by the insured following his insolvency are obtainable by his creditors; while others have ruled that creditors may obtain the insurance money in the proportion that the premiums paid subsequent to the insolvency bear to the sum total of the premiums paid on the policy.

Footnote 1.

The U. S. Bankruptcy Act, Sec. 70, provides that: " Property which prior to the filing of the petition he could by any means have transferred, or which might have been levied upon and sold under judicial process against him, provided that when any bankrupt shall have any insurance policy which has a cash surrender value, payable to himself, his estate or personal representatives, he may, within thirty days after the cash surrender value has been ascertained and stated to the trustee by the company issuing the same, pay or secure to the trustee the sums so ascertained and stated and continue to hold, own and carry such policy free from the claims of the creditors participating in the distribution of his estate under the bankruptcy proceedings; otherwise the policy shall pass to the trustee as assets."

In Clark v. Equitable Life Assurance Society (143 Fed. 175) the court held that: "Policies of life insurance of a bankrupt having an actual value pass to his trustee, and the bankrupt is divested of all interest therein, unless he retains the same under the proviso of the Bankruptcy Act of July 1, 1898, see 541, Sec. 70 (a), by paying the cash surrender value."