At the NACBA Members-Only Fall Workshop in Maui on October 9, 2026, I joined Scott J. Etish, Vice President of Advanced Markets at Coventry, and Kara Gedron of NACBA, for a presentation titled Life Settlements and Bankruptcy: Unlocking Hidden Value in Life Insurance.
The presentation addressed a potentially surprising development for consumer bankruptcy attorneys: A term life insurance policy with no cash surrender value may nevertheless have substantial value on the secondary market.
That creates both opportunities and problems in bankruptcy. For debtors, a policy previously thought to be worthless may provide funds to address financial needs. For Chapter 7 trustees, it may represent an asset worth investigating. And for bankruptcy attorneys, it raises important questions about disclosure, valuation, exemptions, and the timing of any transaction.
How Can Term Life Insurance Have Value?
Traditionally, bankruptcy attorneys distinguish between whole life or universal life insurance, which may accumulate cash surrender value, and term life insurance, which generally does not.
That distinction remains relevant, but it does not necessarily determine a policy's fair market value.
Through a transaction known as a life settlement, an investor purchases an existing life insurance policy, assumes responsibility for future premiums, and ultimately receives the death benefit when the insured dies.
The amount an investor will pay depends on several factors, including the insured's age and health, the death benefit, the cost of maintaining coverage, and the policy's conversion provisions.
Scott presented several examples involving term life policies with no cash surrender value:
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A 69-year-old insured with a $4 million term policy received $285,000.
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A 73-year-old insured with a $1 million term policy received $70,000.
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A 66-year-old insured with a $1.5 million term policy received $30,000.
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A 75-year-old insured with a $1 million term policy approaching its conversion deadline received $60,000.
These are illustrative transactions, not guarantees of what any particular policy might produce.
Generally, the most promising candidates are insureds age 65 or older with policies having death benefits of at least $100,000. Exceptions may exist for younger insureds with serious medical conditions affecting life expectancy.
Other arrangements may permit the policyholder to retain a portion of the death benefit, sometimes without further premium payments, rather than receiving the entire settlement in cash.
The important point is that a policy with zero cash surrender value is not necessarily a policy with zero market value.
Bankruptcy Exemptions: An Important Distinction
The emergence of a secondary market creates a question that many life insurance exemption statutes were never drafted to address.
Does an exemption protecting the life insurance contract, its cash surrender value, or its proceeds also protect the policy's independent market value?
Under the federal exemptions, 11 U.S.C. § 522(d)(7) protects an unmatured life insurance contract, other than credit life insurance, while § 522(d)(8) separately addresses accrued dividends, interest, and loan value.
That statutory distinction provides a substantial argument for protecting the insurance contract itself, even where it has a potential secondary-market value greater than its cash surrender value. Whether that necessarily prevents a trustee from realizing the policy's transferable value is a question requiring further analysis.
North Carolina provides particularly strong protection under Article X, § 5 of the North Carolina Constitution, incorporated into the statutory exemptions through N.C.G.S. § 1C-1601(a)(6).
A life insurance policy insuring the debtor's own life for the sole benefit of the debtor's spouse or children—including adult children—is protected from creditors during the insured's lifetime without a dollar limitation. The constitutional protection applies even if the insured retains the right to change beneficiaries.
That protection, however, depends on the policy's ownership and beneficiary arrangements. It also does not necessarily mean that proceeds received from selling an otherwise exempt policy will retain the same protection.
Other states may provide considerably less protection.
In preparation for the Workshop, I developed a survey of the life insurance exemptions in all 50 states, the District of Columbia, Puerto Rico, and the U.S. territories, focusing specifically on term policies with secondary-market value.
The survey identifies several different statutory approaches:
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Exemptions protecting the unmatured insurance contract itself, often without a dollar limitation.
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Exemptions protecting the contract but separately limiting accumulated cash, loan, or dividend value.
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Exemptions dependent upon the identity of the policy's beneficiaries.
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Exemptions limited to cash surrender value or subject to dollar caps.
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Statutes that do not clearly address the market value of an unmatured term policy.
Importantly, even broad statutory protection does not necessarily settle how a bankruptcy court will treat an independent life-settlement value.
The survey is therefore a research tool, not a definitive determination of how every jurisdiction's courts would decide the question.
Opportunities for Debtors and Chapter 13 Plans
Although the trustee's potential interest in a policy is important, bankruptcy attorneys should also consider whether the policy might help their clients.
For example, a life settlement might provide funds to:
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Pay priority tax obligations.
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Fund or complete a Chapter 13 plan.
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Resolve a Chapter 7 trustee's claim to nonexempt property.
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Address immediate financial needs before filing bankruptcy.
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Provide postbankruptcy funds for debtors who no longer need or cannot afford the insurance coverage.
A transaction may also be appropriate when the policyholder is considering letting an expensive policy lapse.
Of course, a settlement requires careful consideration of the policyholder's continuing insurance needs, the interests of beneficiaries, tax consequences, and the possibility that a sale will convert exempt policy rights into nonexempt cash.
Any transaction during bankruptcy requires analysis of estate ownership, exemptions, trustee rights, and potentially the need for abandonment or court approval.
The client should not be encouraged to sell, surrender, transfer, or change beneficiaries without that analysis.
What About Chapter 7 Trustees?
Chapter 7 trustees have begun asking more questions about life insurance policies that might have secondary-market value.
That is understandable. A debtor might disclose a $500,000 term life policy and report a cash surrender value of $0, while a prospective purchaser might nevertheless be willing to pay a substantial amount for the contract.
The trustee's interest does not, however, establish that the policy or its value is available for liquidation.
A proper analysis requires distinguishing:
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The debtor's contractual rights and whether those rights constitute property of the estate.
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The policy's actual fair market value, as opposed to its cash surrender value.
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The applicability and scope of federal or state exemptions.
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The procedural and substantive requirements for any proposed disposition.
For counsel, the immediate lesson is to obtain adequate information about the policy and avoid allowing it to lapse while those questions remain unresolved.
A Potential Area for Legislative Reform
Our research also identified states where existing exemption statutes may inadequately protect term life insurance policies with no cash surrender value but substantial secondary-market value.
This is an area in which NACBA members might consider pursuing legislative improvements.
The federal exemption provides a useful model. A state could expressly exempt the debtor's interest in an unmatured life insurance contract while separately addressing accumulated cash or loan value and maintaining appropriate protections against fraudulent transfers or last-minute manipulation.
I prepared a preliminary legislative target chart identifying states where that approach may warrant further consideration, including Colorado, Connecticut, Massachusetts, Washington, Minnesota, Arizona, Nebraska, New Hampshire, South Dakota, and Wyoming.
The chart also identifies potential statutory approaches and recent legislative developments that might inform discussions with local consumer bankruptcy attorneys and legislators.
These are suggested research and outreach opportunities, not predictions about the prospects for legislation.
Commentary
For consumer bankruptcy attorneys, the first lesson from this presentation is that we need to stop assuming a term life insurance policy is worthless simply because it has no cash surrender value.
Indeed, the same development that could create an additional asset for a Chapter 7 trustee may also create a significant opportunity for the debtor.
An older debtor struggling to pay legal fees, address priority taxes, or complete a Chapter 13 plan might have a potentially valuable asset that neither the debtor nor the attorney previously recognized.
And an older debtor who has completed bankruptcy may still own a policy that is expensive to maintain, no longer necessary, or approaching expiration. Exploring a life settlement might offer a financial opportunity that would otherwise disappear when the policy lapses.
At the same time, bankruptcy exemptions should protect the debtor's fresh start, not become obsolete simply because financial markets have discovered a new way to value an existing asset.
A life insurance contract that was protected when its only apparent value was zero should not automatically become available to creditors because an investor develops a willingness to purchase it. Whether existing law accomplishes that result is another matter, and one deserving careful research and, where necessary, legislative clarification.
This is also an area where cooperation among NACBA, life settlement professionals, and attorneys working on exemption legislation could provide real benefits to consumers.
I appreciate Scott Etish and Coventry bringing this issue to our attention, as well as Kara Gedron and NACBA for helping make the discussion possible.
Presentation and Research Materials Available to NACBA Members
I am happy to provide the following materials to NACBA members who email me to request copies:
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Life Settlements and Bankruptcy: Unlocking Hidden Value in Life Insurance — NACBA Maui Workshop Presentation (October 9, 2026). The presentation prepared by Coventry examines the secondary market for life insurance, policy valuation, term life settlements, retained death benefits, practical bankruptcy considerations, and potential fiduciary issues. Copies are subject to Coventry's permission and distribution restrictions.
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U.S. Bankruptcy Exemptions for Term Life Insurance with Secondary-Market Value — 50-State and Jurisdictional Survey (September 10, 2026). My research chart examines federal and state life insurance exemptions, including the District of Columbia, Puerto Rico, and the U.S. territories. It distinguishes exemptions for the insurance contract itself from protections for cash surrender value, dividends, loan value, and proceeds, and evaluates potential arguments for protecting secondary-market value. It also identifies unresolved issues requiring additional research and verification.
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Potential Legislative Targets: Term Life Insurance Exemptions — Legislative Target Chart (September 2026). A preliminary research chart identifying states where existing law may leave term life policies with substantial secondary-market value inadequately protected. It summarizes the statutory gaps, possible legislative approaches, and recent legislative developments relevant to evaluating exemption reform.
I would particularly welcome comments from NACBA members who have encountered Chapter 7 trustees seeking to administer term life insurance policies based on life-settlement valuations, as well as attorneys interested in developing better exemption protections in their states.
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