Under the Arizona bankruptcy exemptions, debtors are entitled to “all money received by or payable to a surviving spouse or child on the life of a deceased spouse, parent or legal guardian, not exceeding twenty thousand dollars.” A.R.S. § 33-1126 (A)(1).

Under A.R.S. § 33-1126(A)(6), the cash surrender value of life insurance policies is exempt from the bankruptcy estate when (1) the policy has been owned continuously for an unexpired period of two years by a debtor, and (2) the debtor’s surviving spouse, child, parent, brother or sister or any other dependent family member of the debtor is named as beneficiary of the policy.

In the case of In re Lekas, 299 B.R. 597 (Bankr. D. Ariz., 2003), the Arizona Bankruptcy Court held that the non-exempt portion of the cash surrender value of a term life insurance policy (where the named policy holder is still living) is property of the bankruptcy estate, not the policy itself. Furthermore, the Bankruptcy Court held that a bankruptcy trustee cannot designate the beneficiary under the life insurance policy.

The trustee intended to sell a portion of the policy to a third party for $5,000, thereby designating a new beneficiary of the policy. The Court stated, the sole purpose of the policy is to financially protect the family of the person named on the policy. Supplanting the intended beneficiary of the policy would “severely undermine” the function of the policy. Thus, the Court determined that public policy dictates that the trustee ought not to have the power to designate a beneficiary.

KEYWORDS: Term Life Insurance Policy, Arizona Bankruptcy Exemptions, Bankruptcy Trustee’s Rights to Life Insurance Policy, Bankruptcy Trustee’s Inability to Designate a Beneficiary, A.R.S. Section 33-1126, In re Lekas, $20,000 Death Benefit Exemption, Cash Surrender Value of Life Insurance Policy is Property of Bankruptcy Estate