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Live Assurance and Asset Protection In Bankruptcy

 


Practice Note: 17/02/2023

Death, Bankruptcy and Life Assurance
 

Business people may utilise Life Assurance as part of their asset protection strategy. In this article, we look at traps to avoid and how Life Assurance may assist a person if death and severe financial problems should occur. 

Insurance salesmen, when selling death cover, have long advocated that death can cause financial problems and financial problems can be made worse by death. We add to this by saying that the wrong type of death cover can exasperate financial problems. 

When considering death cover, different types of policies will give very different outcomes if death and bankruptcy should occur. Life Assurance does have protection under the bankruptcy legislation. Death cover which is incorporated into an accident or ill health policy does not.

 

Benefits of Life and Endowment Assurance

The Bankruptcy Act provides protection for Life or Endowment Assurance policies in respect of a person’s life. This gives the following benefits to a bankrupt person: –
  • When the person becomes bankrupt, the Life or Endowment Assurance policy will not vest in the bankrupt estate. It will remain available to the person, without regard to the bankruptcy. 
  • This protection applies for the bankrupt person and his or her spouse or de facto. 
  • Proceeds from Life or Endowment Assurance received on or after the date of bankruptcy are protected and are not available to the bankrupt estate. Assets purchased with these monies are also protected.
Note: Monies from a Life Assurance death pay out received prior to bankruptcy is not protected and is available to the bankruptcy. 
 

Disadvantages of policies for accident or ill health cover which also include death cover

The Bankruptcy Act does not provide protection for policies for accident or ill health cover which also provide death benefits. The Court has held that policies against accident or ill health which also provide death benefits are not policies of Life Assurance (Re: Estate of Carter (1962) 19 ABC 144). This gives the following disadvantages to a bankrupt person: –
  • If the person becomes bankrupt, any death benefit entitlement will be available to the bankruptcy.
  • Monies received from a death benefit pay out prior to when a person becomes bankrupt is available to the bankruptcy. 
  • Proceeds from the death benefit received on or after the date of bankruptcy is payable to the bankruptcy as are assets purchased with those monies.
TIP: Clients seeking accident, ill health and death cover may decide to have separate life assurance cover in addition to a policy for accident or ill health.

Clients should obtain independent advice relevant to their circumstances before deciding on their death cover. 

 

Examples of how a Life Assurance policy can assist a bankrupt person

We now provide some examples of how a policy of Life or Endowment Assurance may provide benefit for a client when bankruptcy and death occur.

Example 1
Situation: A person needs to become bankrupt, and the spouse has just died. A Life Assurance policy on the spouse’s life is in place and the policy is owned by the person who needs to become bankrupt. 
Answer: Because Life Assurance policies are protected under the Bankruptcy Act, the person can file for bankruptcy and the Life Assurance policy will not form part of the persons bankruptcy. Once the person is bankrupt, the death entitlement pay out which is received is protected as are assets which the bankrupt person purchases with those monies. Note: if a death entitlement pay out is received prior to bankruptcy, it is not protected and will be lost to the bankruptcy.

 
Example 2
Situation: A person is bankrupt, and the spouse dies. A life assurance policy on the spouse’s life is in place with the policy owned by the bankrupt person.
Answer: Because Life Assurance policies are protected under the Bankruptcy Act, the Life Assurance policy on the spouse’s life does not form part of the bankruptcy. The death entitlement pay out which the bankrupt person receives is protected as are assets purchased with those monies. For example, the bankrupt person may use the monies to save his or her house from the bankruptcy or buy a new house. 

Example 3
Situation: The client’s spouse is bankrupt, and the client is killed in a car accident. A life assurance policy on the client’s life is in place with the policy owned by the spouse. 
Answer: Because Life Assurance policies are protected under the Bankruptcy Act, the life assurance policy on the client’s life does not form part of the spouse’s bankruptcy. Assets of the client’s deceased estate which are left to the spouse will be caught by the spouse’s bankruptcy. However, the death entitlement pay out which the spouse receives from the Life Assurance policy is protected, as are assets the spouse purchases with those monies. 

Example 4
Situation: The client and the spouse are bankrupt. The client dies from a heart attack. A Life Assurance policy on the client’s life is in place with the policy owned by the spouse.
Answer: Because Life Assurance policies are protected under the Bankruptcy Act, the Life Assurance does not form part of either bankrupt estate. The death entitlement pay out which the spouse receives is protected for the spouse, as are assets the spouse purchases with those monies.  

Questions
If you have any questions on Life Assurance and bankruptcy, please call Alan Nicholls on 1300 060 122.
 
Nicholls & Co
Nicholls & Co are personal insolvency specialists. Personal Insolvency is our sole area of practice. We have been in practice since 1987 and service all States and Territories of Australia. 

Should any of your clients have excessive debt and wish to explore how bankruptcy can assist them to resolve their debt and reset for the future, we welcome your enquiry for our independent, creditable advice.

 
Further Reading
For further information on bankruptcy, we recommend the following articles:
Assistance
For your questions on bankruptcy and how it can help the insolvent person to reset for the future call 1300 060 122 or email helpdesk@nichollsco.com.au.
  
ABC Radio
Alan Nicholls’ interview on ABC Radio, provides insight into the Nicholls & Co approach when we assist people to get past their severe financial problems. It can be accessed here.
 
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