The Game of Life

The Game of Life was one of my favorites growing up. I always prayed to land on the best profession and get the biggest house.  I also remember that you could purchase different kinds of insurance: fire, home, auto, or life.  While having the big house is great, having the insurance to protect what’s important to you is even better, right?

Well, it seems that if the Game of Life happens to bring you to bankruptcy court in Arizona, you may soon be playing the Game of Life Insurance. In this game, that life insurance policy that you probably did not value when playing a game as a kid, but hold dear as an adult, is also highly coveted by your bankruptcy trustee. We are going back to our favorite Arizona exemptions here.  Remember, when you file Chapter 7 bankruptcy, you can exempt certain assets from your bankruptcy estate and your creditors. Arizona statutes allow for protection of insurance proceeds where the policy has been held for two years and has named as the beneficiary a spouse, child, parent brother, sister, or any other dependent family member (A.R.S. Section 33-1126).

Last year, two trustees in Tucson challenged the exemption of benefits where adult children were named as the debtors’ beneficiaries.  The trustees contended that the beneficiary must be a dependent child in order to exempt the proceeds from the bankruptcy estate. Unfortunately, a bankruptcy appellate panel agreed with them. If you read the opinion a lot of the decision comes down to sentence construction and what the phrase “any other” is modifying. I know its crazy to think that a legal issue might be decided based upon sentence structure, but, in the absence of other court decisions, it can often happen that way.

So, what do the players in The Game of Life Insurance do?  It’s hard to say. The decision is supposedly on appeal, so it is not hard and fast law. Which means, you may get a trustee who does not view the proceeds in the same way and will not pursue them.  Whatever the case, it is important that, as a debtor, you mention the existence of life insurance policies to your bankruptcy lawyer. Especially if you have whole life insurance policies (which carry cash surrender value) and have adult children as your beneficiaries. In this case, you may want to cash out the policies prior to filing and live off the proceeds. Of course, you also want to be careful of being a bankruptcy hog.