Life Insurance and Superannuation proceeds – when are these amounts protected from Bankruptcy?
Life insurance proceeds are generally payable to the nominated beneficiary. Superannuation can generally be accessed by the beneficiary once reaching retirement age. However, when a person becomes bankrupt, who becomes entitled to their life insurance and superannuation proceeds? It all depends on timing.
Under the Bankruptcy legislation, any monies held in a regulated superannuation fund at the date of bankruptcy will not be divisible in a bankrupt estate, meaning those monies cannot be used to pay creditors in a bankruptcy. The proceeds of the superannuation fund and anything wholly or substantially purchased with monies drawn from the fund after bankruptcy is also protected. Both the monies held in the superannuation fund and any items purchased with those monies do not form part of a bankrupt’s estate.
The same rule applies to life insurance proceeds. Provided the proceeds are received on or after bankruptcy, they will not form part of the divisible assets of a bankrupt’s estate.
If a bankrupt passes away during their bankruptcy, any proceeds paid out from life insurance policies or superannuation will be paid to the executors of the deceased’s estate and not to their Trustee in Bankruptcy. Therefore, the proceeds will be divided in accordance with the deceased’s will or in accordance with intestacy laws, and will not go to the creditors in the bankruptcy.
If, however, a life insurance policy or superannuation is paid out before Trustees in Bankruptcy are appointed to a bankrupt’s estate, these proceeds will form part of the bankruptcy and creditors are entitled to these funds. Therefore, any distributions made of these funds to the bankrupt may be recoverable, including any property purchased with the funds by the bankrupt.
However, if the funds are directed to a third party as beneficiary under a life insurance policy, and never become property of a bankrupt, these amounts may also be protected from bankruptcy.
If you require advice about bankruptcy and your rights in relation to life insurance and superannuation, contact McLaughlins Lawyers, your Gold Coast lawyers.