BECKLEY, WV (LOOTPRESS) – Most people think about life insurance for one reason: what happens when they die.
They think about replacing income, paying off the mortgage, taking care of children, or leaving something behind for a spouse.
What many West Virginians don’t realize is that certain life insurance policies and annuities can also provide substantial protection while you’re alive, particularly if financial disaster strikes.
A few years ago, the West Virginia Legislature quietly made a significant change to our bankruptcy laws. In 2023, House Bill 2221 amended West Virginia Code §38-10-4, which determines what property a West Virginian can exempt when filing bankruptcy.
I was one of the sponsors of that legislation, along with Delegate Steve Westfall and several of our colleagues.
There wasn’t much fanfare surrounding it. It wasn’t the kind of bill that generated television interviews or dominated social media.
But for families trying to build and preserve wealth, it was important.
Among other changes, we removed monetary limitations that had applied to certain life insurance and annuity protections in bankruptcy. The result is an unusually powerful protection that many West Virginians, and frankly, many financial professionals, may not fully appreciate.
First, What Does “Exempt” Mean?
When someone files bankruptcy, that doesn’t necessarily mean everything they own gets thrown into a pile and handed to creditors.
Bankruptcy law recognizes certain exempt property.
Exempt property is generally property the debtor is permitted to protect from the bankruptcy estate, subject to the particular requirements of the applicable exemption.
West Virginia has its own bankruptcy exemption statute. It protects certain amounts or categories of property, including a residence, a vehicle, household property, tools of the trade, retirement benefits and several other types of assets.
Some of those exemptions have dollar limits.
Life insurance and certain annuity interests are different.
West Virginia Code §38-10-4(j)(3) now protects all life insurance proceeds paid to a debtor as beneficiary. It also addresses annuities paid to a debtor as beneficiary, subject to the statute’s treatment of certain retirement-type annuities elsewhere in the section.
Perhaps most importantly for asset-planning purposes, the statute protects annuities or life insurance policies owned by the debtor that are payable to someone other than the debtor, including applicable cash surrender value.
Those last few words matter enormously.
What Is Cash Value?
Not every life insurance policy has cash value.
Term insurance generally provides pure death-benefit protection for a specified period. If you have a $1 million term policy, that doesn’t mean you have $1 million sitting in an account somewhere that you can withdraw.
Permanent life insurance can work differently.
Whole life, universal life and certain other permanent policies can accumulate cash value inside the policy over time.
Depending on the contract, the policyholder may have access to that value through withdrawals, surrender of the policy or policy loans.
For someone who has owned and funded a permanent life insurance policy for many years, that cash value can become substantial.
It is an asset.
And that’s where the bankruptcy exemption becomes interesting.
West Virginia law expressly includes applicable cash surrender value within the protection afforded to qualifying life insurance policies owned by a debtor and payable to someone other than the debtor.
That distinction can make a tremendous difference.
Why We Changed the Law
Before HB 2221, West Virginia’s treatment of these assets was more restrictive.
The legislation began with proposed monetary limits, but the final law went further. The Legislature’s official summary of HB 2221 described the result plainly: the previously limited exemption for life insurance proceeds paid to the debtor was expanded to have no limitation, and the cash surrender value of policies owned by the debtor and naming someone else as beneficiary was fully exempted.
Federal bankruptcy law allows States to set their own limits for exemption of certain assets under federal bankruptcy law. For years, West Virginia’s limits were set significantly lower than other states. As a matter of fact, they were amongst the lowest in the country. Federal law did not set a limit, and Delegate Westfall and I had a bold idea to help West Virginian’s planning for an uncertain future: let’s make it unlimited.
The bill passed the Legislature in March 2023, was signed by the governor on March 29, 2023, and became effective June 7 of that year.
It was a deliberate policy decision.
Life insurance isn’t merely an investment account.
Its primary purpose is generally protection.
A parent may spend decades paying premiums because he wants his wife and children financially secure if he dies. A family may build significant value inside a permanent policy as part of a long-term financial strategy.
If that same person experiences a business failure, catastrophic debt, lawsuit or another financial disaster later in life, forcing liquidation of the family’s life insurance could defeat the very purpose for which the policy existed.
We decided West Virginia law should provide stronger protection.
Annuities Can Receive Significant Protection Too
Annuities are another area people frequently misunderstand.
At their simplest, annuities are contracts issued by insurance companies that can be used for accumulation, retirement income, guaranteed income strategies and estate planning.
There are many varieties, and their tax and financial characteristics can differ substantially.
West Virginia’s bankruptcy statute provides important protection for annuities as well.
Section 38-10-4(j)(3) includes annuities paid to a debtor as beneficiary, other than certain annuities addressed separately under the statute’s retirement provisions. It also protects annuities owned by the debtor that are payable to someone other than the debtor.
That can make insurance products an important part of a broader discussion about protecting wealth.
But, and this is important, asset protection is not the same thing as hiding assets.
You Cannot Wait Until the House Is on Fire
People sometimes hear about asset-protection laws and immediately get the wrong idea.
They imagine someone losing a lawsuit on Monday, moving all his money somewhere on Tuesday, and filing bankruptcy on Wednesday.
That’s not legitimate asset planning.
Bankruptcy law contains powerful provisions dealing with fraudulent transfers, preferential transfers and other transactions occurring before bankruptcy. State law also provides remedies when property is transferred with the intent to hinder or defraud creditors.
A statute protecting an asset does not give someone permission to commit fraud.
Good asset protection is done prospectively.
You build the lifeboat before the ship starts sinking.
For example, a business owner with no current creditor problems might reasonably sit down with his attorney, accountant and financial professional and ask:
How should I structure my assets for retirement?
What happens to my family if I die?
What assets are exposed if I’m sued?
How are my retirement accounts protected?
How is my home titled?
Do trusts make sense?
What role should life insurance play?
Would an annuity fit my retirement objectives?
Those are legitimate planning questions.
Waiting until you’ve already been sued or incurred an enormous debt changes the analysis considerably.
This Isn’t an Argument to Buy the Wrong Insurance
There is another point worth emphasizing.
A bankruptcy exemption, standing alone, is not a reason to buy a financial product.
I’ve spent enough of my professional life around both law and financial services to know that insurance products have to make economic sense first.
Permanent life insurance can be extremely useful in the right circumstances. It can also be expensive and inappropriate in others.
The same is true of annuities.
There are surrender charges, expenses, tax considerations, liquidity issues, insurer-credit considerations and different product designs that must be evaluated.
Someone shouldn’t walk into an insurance office with $100,000 and say, “I read that annuities are protected in bankruptcy, so put all my money into one.”
That’s not planning.
The better approach is to understand that creditor and bankruptcy protection are characteristics that may be considered alongside all of the other characteristics of an insurance product.
Asset Protection Is Really About Planning Ahead
Most people don’t wake up one morning intending to file bankruptcy.
A successful contractor can suffer a catastrophic business failure.
A physician can face a judgment.
A small-business owner can personally guarantee debt that later becomes impossible to service.
A family can experience an unexpected financial catastrophe.
Someone who appears financially secure at 45 can face an entirely different reality at 55.
That’s why asset protection should be discussed when things are going well, not merely after something goes wrong.
We routinely talk about diversification in investing.
There is also value in thinking about diversification of legal exposure.
Your house may have one type of protection.
Your qualified retirement account may have another.
A properly structured trust may provide another.
Life insurance may provide another.
An annuity may provide another.
None should be viewed in isolation.
The objective is to build a financial and estate plan in which the pieces work together.
A Quiet Change With a Big Impact
HB 2221 wasn’t one of the most famous bills I worked on during my time in the Legislature.
It probably never made the evening news.
But Steve Westfall and I understood something important: people spend their entire lives building assets, and sensible laws should allow families to protect certain assets intended to provide long-term financial security.
Today, West Virginia law provides substantial bankruptcy protection for qualifying life insurance proceeds, certain annuity interests and, importantly, the applicable cash surrender value of qualifying life insurance policies owned by the debtor and payable to someone else.
For someone with substantial cash value accumulated in a permanent life insurance policy, that provision can potentially mean protecting an asset built over decades rather than watching it disappear during the worst financial period of that person’s life.
That’s worth knowing.
And it’s another reason estate planning shouldn’t simply be a conversation about who gets your property when you die.
Good planning also asks a second question:
How do we protect what you’ve built while you’re still here?
This article provides general information about West Virginia law and is not legal, tax, bankruptcy, insurance, or financial advice. Bankruptcy exemptions and insurance products involve fact-specific legal and financial issues. Individuals should consult appropriate legal, tax and financial professionals regarding their particular circumstances.
