01 Jul 2014

Proceeds of Life Insurance lose protection


3 min

Who gets the life insurance money – your estate, your heir or your bankruptcy trustee?

Many of our regular readers would recall the articles that we have previously written about Superannuation and its protected status under the Bankruptcy Act. The Act (at section 116) states that monies held in a regulated superannuation fund at the date of bankruptcy are not divisible property, and later in the section, that the proceeds of the fund and anything purchased with that money drawn down after bankruptcy that is wholly or substantially purchased with that money, is also not divisible in the estate. The funds and the purchased item hold an ‘exempt’ status.

The major point in those articles is that, to be non-divisible property, the money still had to be in the regulated superannuation fund at the date of bankruptcy. If it had been drawn down before the bankruptcy, it lost its exemption and the money vested in the trustee in bankruptcy as divisible property.

Policies of life insurance effectively have the same protection. The Act (s116(2)(d)(i)) specifically states that “policies of life assurance or endowment assurance in respect of the life of the bankrupt or the spouse or de facto partner of the bankrupt;” are not divisible. So a trustee in bankruptcy cannot deal with the policy.

But what about the proceeds of that policy?

Subject to one rather large exception, the proceeds, like the proceeds from superannuation maintain ‘exempt money’ status and it or anything purchased with it, was not divisible. The exception is effectively the same as with superannuation.

Section 116(2)(d)(ii) states that non-divisible status applies to “the proceeds of such policies received on or after the date of the bankruptcy”. For proceeds from a life insurance policy to be exempt monies and for anything purchased with those funds post bankruptcy to be non-divisible, the proceeds have to be received on or after the bankruptcy.

We have had occasions where bankrupts have passed away during their bankruptcy. Any proceeds from these policies will be paid to the executors and not the bankruptcy trustee and will be exempt from the estate. We have also had occasions where we have been appointed as trustees in bankruptcy to deceased estates (Part XI of the Bankruptcy Act) and where the proceeds from these policies have been paid after our appointment.

Sometimes this has just been by luck, and sometimes because executors may have purposely delayed the payment until after the Sequestration Order has been made. Sometimes, however, we have been appointed to deceased estates where the policy had previously paid out monies and, only after that, was the deceased estate deemed insolvent an application made for the bankruptcy. In these cases the proceeds paid out prior to bankruptcy are divisible and, maybe more distressing to the parties involved, any distribution of the proceeds that had been made before the Sequestration Order may be recoverable from the recipients.

This may happen where the deceased (his estate) was the one receiving the proceeds from the policy. If those proceeds are directed to another person as beneficiary of the policy, and never become property of the bankrupt or the estate, as I understand the position, they cannot vest in the trustee.

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