15 March 2016
Answer: It depends.
Massachusetts has many different statutes that provide
protection of the cash value of whole life insurance policies, this post is to
address three of them namely, Mass. Gen. Laws. c. 175 §§ 119A, 125 and 126.
To understand Massachusetts exemption statutes on life
insurance it is necessary to understand the players with respect to a life
insurance policy. There is a person that
initially purchased the policy, sometimes referred to as the effectuator, who is
usually the owner of the policy. Then
there is the insured, which is the person whose life the policy is based
on. Lastly there is the beneficiary, who
is the person that will receive the payout upon death.
Section 119A is fairly easy to understand, basically it
comes down to the language of the policy itself. The section permits a policy that has
language prohibiting the beneficiary from “commut[ing], anticipat[ing],
encumber[ing] alienat[ing], or assign[ing]” the policy to be protected. It essentially allows the terms of the
policy, if they shield the asset from creditors, to be honored. It the policy does not have such language,
then the section is not applicable. In re Sloss, 279 B.R. 6,
9-10 (Bankr. D. Mass. 2002). Simply
based on antidotal evidence, the author believes that most life insurance
policies freely allow beneficiaries to be changed, and thus, this section will
rarely apply. See e.g. In re
Levesque, Case No. 07-17943, (Bankr. D. Mass. Aug. 21, 2008) (policy
language permitting change of owner or beneficiary); In re Sloss, 279 B.R. 6, 9-10 (same).
Initially, with respect to section 125 and 126, we must
note that the exemptions are focused on the rights of the beneficiaries,
instead of the owner(s) or effectuator(s) of the policy. Massachusetts courts have ruled that since
section 125 and 126 are based on the beneficiary, that to give the benefit
intended, the cash value of a policy is protected in addition to any
payout. Rosenberg v. Robbins, 289
Mass. 402 (1935); In re CRS
Stream, Inc., 217 B.R. 365, 369 (Bankr. D. Mass. 1998); In re Beach, 8 F. Supp.
910.
Section 125 is the broader of the two, it essentially has
three limitations to the full protection provided for in the statute. The first is that premium payments paid in
fraud of creditors are not protected. In re Sloss, 279 B.R. 6,
14. This is rarely alleged and hard to
prove, thus the author believes this provision would rarely apply. The second limitation is that the protection
only goes to the initial beneficiary of the policy. Id.
So, if the beneficiary has been changed from its inception, the
subsequent beneficiary has no protection.
The third and last limitation is that the beneficiary must have an
insurable interest in the insured. In re Chevalier, 330 B.R.
21, 25-26 (Bankr. D. Mass. 2005). This
has been described as “some reasonable expectation of pecuniary benefit or
advantage from the continued life of the insured.” Id. at 26 quoting In re Caron, 305 B.R. 614, 616 (Bankr. D.
Mass. 2004). Typically, if the insurance
policy exists, (at least with respect to the original beneficiary), there is an
insurable interest because life insurance companies do not issue policies
unless an insurable interest exists. One
final note, the insurable interest need only exist at the time the policy was
issued. Id.
Section 126 is the most unique and complicated of the
statutes on life insurance. In contrast
to section 125, it does not matter if the beneficiary has been changed from when
the policy effected, the policy is exempt if the beneficiary is a married
woman. Although the statute is silent
with respect to who the insured must be, at least one court has ruled that the
insured must be the married husband. In re Chung-I Liang and Yu-Chi
Chao, Case No. 11-43709, 2012 Bankr. LEXIS 2903 (Bankr. D. Mass. June 26,
2012). One interesting expansion to the
statute has been to determine that divorce does not change or alter the initial
protection. In re Chevalier, 330 B.R. 21, 27 fn.7 (Bankr. D.
Mass. 2002); In re Sloss,
279 B.R. 6, 16. Thus, if a woman gets
divorced and is no longer a “married woman” for that reason, the protection
endures.
Keep in mind that this blog only explores the applicability
of the described statutes in a general sense and is not a replacement for a
valid legal opinion by a qualified attorney.
In the event that you have financial and legal matters that you need legal advice for, feel free to contact the author to consider an engagement.
