Over my many years of working with Indiana bankruptcy clients, I’ve seen many different sets of circumstances that gradually build into unmanageable debt loads. Job layoffs, medical costs, and divorce are still the big three factors leading to bankruptcy, but there are other factors as well, including small business failure, lawsuits, and resetting subprime adjustable rate mortgages. Rarely is there one sudden event; it’s usually a combination of factors building up over a period of months or even years. Folks begin abusing credit and debit cards, selling stuff, and cashing in stuff. Sometimes that “stuff” includes life insurance policies.

In my ongoing effort to keep up with the news and with all facets of financial planning that can help me advise my bankruptcy clients, I subscribe to different journals and newsletters on employee benefits, tax issues, real estate, and financial planning. In the August issue of Financial Planning magazine I found an article on life insurance that has some valuable information. “Clients’ unwanted life insurance policies can be abandoned, surrendered, donated, or even sold in a rapidly expanded secondary market”, the article pointed out.

Now, for most people, the money they would receive from cashing in a whole life or universal life insurance policy isn’t going to be enough to avert bankruptcy or foreclosure. And allowing a term insurance policy to lapse by not paying the premiums may mean losing needed family protection. Bankruptcy law, in fact, tries to protect people’s life insurance.

As I’ve mentioned in earlier blogs, I helped write the exemption section of the latest Indiana bankruptcy laws, and life insurance on a debtor’s life is one of those exemptions (meaning that in most cases, the policy can’t be taken by creditors to satisfy the debt).

In some cases, though, life insurance protection is no longer needed. Perhaps the original purpose of the insurance was to fund college education for a now-grown child. Perhaps the purpose was to back up a buy-sell agreement for a business that no longer exists. For this type of situation, the article discusses life settlements. A life settlement is a sale of a life insurance policy to investors. This is no brand new idea – last year alone, $15 billion worth of life insurance settlements were transacted. In many cases, the sellers received more money than they would have received just cashing in the policy.

Just as I always remind readers when I talk about the economy that I am no economist, I need to mention that I’m certainly no life insurance expert. What I do want to emphasize is that individuals and families in debt should, as early as possibly in the process of dealing with a deteriorating financial situation, seek out professional help. Then all options can be explored, including how to best deal with life insurance policies.