Are life insurance cash values fully protected from creditors in Texas?

Plain-English summary

The Insurance Commissioner asked how two Texas statutes fit together when a creditor goes after a debtor's life insurance. Sections 42.001 and 42.002 of the Property Code exempt certain personal property from seizure, but only up to a dollar cap (raised by the 1991 Legislature to $60,000 for a family and $30,000 for a single adult). One of the twelve categories of exempt personal property is the present value of a life insurance policy where a family member or dependent is the beneficiary. Article 21.22 of the Insurance Code, also amended in 1991, says all money or benefits under a life, health, or accident policy, "including policy proceeds and cash values," are fully exempt from execution, attachment, garnishment, or other process. The question was whether life insurance cash value was completely exempt, or only exempt up to the Property Code cap, and separately whether the exemption covered individually purchased annuities.

On the first question, the Attorney General concluded the Insurance Code's exemption was total. The two statutes did not really conflict on proceeds: the Property Code exempts only a policy's cash (present) value, while article 21.22 expressly exempts proceeds, which are unquestionably fully exempt. On cash value, the statutes overlapped, but the opinion concluded article 21.22's complete exemption prevailed over the Property Code's capped one. Three things drove that. The legislative history of Senate Bill 1261 showed the Legislature meant to give an "unlimited exemption" and to override the Property Code caps, in direct response to a bankruptcy decision (In re Brothers) that had let creditors cap life insurance cash values. Article 21.22 was the more specific statute on cash values. And it was enacted after the Property Code amendment, so as the later expression of legislative intent it controlled. The result: life insurance proceeds and cash values were wholly exempt from seizure.

On the second question, the answer was no. Article 21.22 exempts benefits under "any plan or program of annuities and benefits in use by any employer," but says nothing about annuities a person buys individually. The opinion found that Senate Bill 1261 never proposed to exempt individually purchased annuities and that no legislative history discussed doing so. From that, the opinion concluded the Legislature intentionally left individually purchased annuities out of the exemption.

Currency note

This opinion was issued in 1992. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. The Property Code's exemption caps have been raised since 1992, the treatment of annuities has changed by later amendment, and article 21.22 of the Insurance Code has been amended, so confirm the current statutes before relying on any cap or exemption stated here.

Background and statutory framework

The first question required harmonizing two statutes the 72d Legislature amended in 1991. Senate Bill 654 amended Property Code section 42.001 to exempt personal property described in section 42.002 from seizure up to an aggregate fair market value of $60,000 for a family or $30,000 for a single adult, exclusive of liens. Prop. Code § 42.001(a). Section 42.002 lists twelve categories of exempt personal property, including the present value of a life insurance policy where a family member of the insured, or a dependent of a single insured adult, is the beneficiary. Id. § 42.002(a)(12). So a debtor could exempt a policy's present value, but only within the overall dollar cap.

Senate Bill 1261 amended Insurance Code article 21.22 to provide that, notwithstanding any other provision of the code, all money or benefits, "including policy proceeds and cash values," paid under a life, health, or accident policy, or under any employer plan or program of annuities and benefits, inure exclusively to the designated beneficiary and are "fully exempt" from execution, attachment, garnishment, or other process, from being applied to any debt of the insured or beneficiary before or after payment, and from all demands in bankruptcy. Ins. Code art. 21.22, § 1. The opinion limited its discussion to life insurance, because the Property Code exempted only the present value of a life policy, so there was no conflict as to health and accident coverage.

The opinion treated the "present value" used in the Property Code as equivalent to the "cash surrender value" or "cash value" used in article 21.22; Senate Bill 654 had changed the term from "cash surrender value" to "present value" without substantive effect. Because the Property Code exempted only cash value (not proceeds), proceeds were wholly exempt under article 21.22 with no conflict. The remaining overlap was over cash value. Before the 1991 amendment, article 21.22 had exempted "money or benefits . . . to be paid or rendered to the insured or any beneficiary," and a bankruptcy court had read that to exempt only proceeds paid to beneficiaries, not cash surrender values, leaving cash values exempt only within the Property Code caps. In re Brothers, 94 B.R. 82, 83 (Bankr. N.D. Tex. 1988). The Legislature then amended article 21.22 expressly to add cash value.

The opinion found the legislative intent clear. Senate Bill 1261 was enacted to provide an "unlimited exemption from seizure" of life insurance benefits, and committee testimony showed the Legislature knew of the Property Code caps and of Brothers and meant article 21.22 to override those caps so the benefits could not be capped. The opinion construed the total exemption in article 21.22 to prevail over the limited Property Code exemption, noting in support that the more specific statute prevails over the general one in an irreconcilable conflict, Gov't Code § 311.026, and that the later-enacted statute prevails, citing Attorney General Opinion JM-1137 (1990). Life insurance proceeds and cash values were therefore wholly exempt from seizure.

On the second question, the opinion read article 21.22's reference to annuities "in use by any employer" against its silence on individually purchased annuities. Because Senate Bill 1261 never proposed exempting individually purchased annuities and no legislative history discussed it, the opinion concluded the Legislature intentionally excluded them, so article 21.22 did not exempt individually purchased annuities from seizure.

Common questions

Were life insurance cash values fully protected from creditors, or only up to a cap?
Fully protected. The opinion concluded article 21.22 of the Insurance Code wholly exempted both proceeds and cash values, and that this total exemption beat the Property Code's dollar-capped exemption.

Why didn't the Property Code cap apply to life insurance cash value?
Because article 21.22 was more specific on cash values and was enacted later, and the legislative history showed the Legislature meant it to override the Property Code caps in response to the Brothers bankruptcy decision.

Did the exemption cover annuities?
Only employer-provided annuities. Article 21.22 exempted benefits under an employer's plan or program of annuities, but the opinion concluded it did not exempt annuities a person buys individually.

Why were individually purchased annuities left out?
The opinion found the Legislature intentionally omitted them: the bill never proposed to exempt them and no legislative history discussed doing so.

Citations

• Tex. Property Code §§ 42.001, 42.002
• Tex. Insurance Code art. 21.22, § 1
• Tex. Gov't Code § 311.026
• Senate Bill 654, Acts 1991, 72d Leg., ch. 175, § 1; Senate Bill 1261, Acts 1991, 72d Leg., ch. 609, § 1; Acts 1987, 70th Leg., ch. 5, § 1
• In re Brothers, 94 B.R. 82 (Bankr. N.D. Tex. 1988)
• Tex. Att'y Gen. Op. JM-1137 (1990)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0125
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1992/dm0125.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

Office of the Attorney General
State of Texas

DAN MORALES
ATTORNEY GENERAL

June 9, 1992

Ms. Georgia D. Flint
Commissioner
Texas Department of Insurance
P. O. Box 149104
Austin, Texas 78714-9104

Opinion No. DM-125

Re: Whether, considering sections 42.001 and 42.002 of the Property Code and article 21.22 of the Insurance Code, life insurance policy proceeds and cash values are completely exempt from seizure under process, and related questions (RQ-251)

Dear Ms. Flint:

You have requested our opinion regarding whether and to what extent state law exempts from seizure under process life insurance policy proceeds and cash values, and individually purchased annuities. Specifically, you ask the following:

(1) Whether insurance policy proceeds and cash values are completely exempt from seizure under process or whether those benefits are exempt from seizure to the extent of the maximum amounts set out in section 42.001 of the Property Code; and

(2) Whether the Texas Insurance Code article 21.22 exemption includes individually purchased annuities.

The resolution of the first issue you raise requires this office to construe two apparently conflicting statutes, both of which the 72d Legislature amended during its regular session. Senate Bill 654, Acts 1991, 72d Leg., ch. 175, § 1, amended section 42.001 of the Property Code to read, in pertinent part, as follows:

(a) Personal property, as described in Section 42.002, is exempt from garnishment, attachment, execution, or other seizure if:

   (1) the property is provided for a family and has an aggregate fair market value of not more than $60,000, exclusive of the amount of any liens, security interests, or other charges encumbering the property; or

   (2) the property is owned by a single adult, who is not a member of a family, and has an aggregate fair market value of not more than $30,000, exclusive of the amount of any liens, security interests, or other charges encumbering the property.

Prop. Code § 42.001(a). Section 42.002 describes twelve categories of personal property that are exempt under section 42.001(a), including "the present value of any life insurance policy to the extent that a member of the family of the insured or a dependent of a single insured adult claiming the exemption is a beneficiary of the policy." Id. § 42.002(a)(12). Thus, under sections 42.001 and 42.002, a person may exempt from seizure under process personal property from any combination of the twelve categories, so long as the aggregate fair market value of the exempted personal property does not exceed either $60,000, if the property is provided for a family, or $30,000, if the property is owned by a single adult who is not a member of a family.[1] A person whose property is subject to seizure under process could choose to exempt from seizure the present value of a life insurance policy to the extent that a family member of the insured or dependent of a single insured adult claiming the exemption is the beneficiary, but only if the aggregate fair market value of all the personal property the debtor chooses to exempt does not exceed the amounts set forth in section 42.001(a)(1), (2).

[1] Section 42.001(a)(1), (2) of the Property Code specifies that the aggregate fair market value is to be determined "exclusive of the amount of any liens, security interests, or other charges encumbering the property."

Senate Bill 1261, Acts 1991, 72d Leg., ch. 609, § 1, amended article 21.22 of the Insurance Code in a way that, you contend, conflicts with sections 42.001 and 42.002 of the Property Code. In pertinent part, article 21.22 now reads as follows:

Notwithstanding any provision of this code other than this article, all money or benefits of any kind, including policy proceeds and cash values, to be paid or rendered to the insured or any beneficiary under any policy of insurance issued by a life, health or accident insurance company, including mutual and fraternal insurance, or under any plan or program of annuities and benefits in use by any employer, shall:

   (1) inure exclusively to the benefit of the person for whose use and benefit the insurance is designated in the policy;

   (2) be fully exempt from execution, attachment, garnishment or other process;

   (3) be fully exempt from being seized, taken or appropriated or applied by any legal or equitable process or operation of law to pay any debt or liability of the insured or of any beneficiary, either before or after said money or benefits is or are paid or rendered; and

   (4) be fully exempt from all demands in any bankruptcy proceeding of the insured or beneficiary.

Ins. Code art. 21.22, § 1. The Insurance Code thus wholly exempts from seizure under process life insurance policy proceeds and cash values to be paid to the insured or any beneficiary.[2]

[2] We note that article 21.22 of the Insurance Code also wholly exempts from seizure under process policy proceeds and cash values to be paid under any health or accident insurance policy, as well as under any life insurance policy. As sections 42.001 and 42.002 of the Property Code only exempt from seizure under process the present value of a life insurance policy, article 21.22 of the Insurance Code does not conflict with sections 42.001 and 42.002 of the Property Code on the matter of health and accident insurance policies. Accordingly, we limit our discussion to proceeds and cash or present values paid under a life insurance policy.

Senate Bill 654 amended sections 42.001 and 42.002 primarily to raise the exemption for personal property from forced sale from $30,000 to $60,000 for a family, and to $30,000 for a single adult who is not a member of a family. Unlimited Exemption of Insurance Benefits From Seizure Under Process: Hearings on S.B. 654 Before the Senate Jurisprudence Comm., 72d Leg. 1 (Mar. 26, 1991) (statement of Senator Parker, sponsor of bill) (copy on file with Texas Senate Staff Services).[3]

[3] Senator Parker pointed out that the $30,000 exemption for personal property, set in 1973, equaled $78,000 in 1991. Hearings on S.B. 654 Before the Senate Jurisprudence Comm., 72d Leg. 1 (Mar. 26, 1991) (statement of Senator Parker, sponsor of bill) (copy on file with Texas Senate Staff Services); see also id. (testimony of Neal Miller, witness). Thus, in Senator Parker's original bill, he proposed to exempt personal property with an aggregate fair market value in the amount of $76,000 for personal property provided for a family and $38,000 for personal property owned by a single adult who is not a member of a family. By the time the Senate had engrossed the bill, however, the exemption had been cut to $60,000 for personal property provided for a family and $30,000 for personal property owned by a single adult who is not a member of a family. Both houses of the legislature then passed Senate Bill 654 with these amounts left intact.

The bill changed the language in a number of other parts of sections 42.001 and 42.002 in ways that the legislature hoped would clarify the law, but most of the changes were nonsubstantive. See id. at 2 (testimony of Joseph McKnight, witness); id. at 5 (testimony of Mike Maroney, witness). For example, prior to the 1991 amendments, sections 42.001 and 42.002 provided a limited exemption from seizure under process for the "cash surrender value" of a life insurance policy. Senate Bill 654 changed the terminology from "cash surrender value" to "present value." We do not understand this change to be substantive. Accordingly, the "present value" of a life insurance policy, discussed in sections 42.001 and 42.002 of the Property Code, is equivalent to the "cash surrender value" or "cash value" of a life insurance policy, the term that article 21.22 of the Insurance Code uses.[4]

[4] The "cash surrender value" of a life insurance contract has been defined as the cash value (as determined by rules set forth in the governing statute and the nonforfeiture section of the insurance policy) of a policy that a person having the contractual right to do so has surrendered to the insurer. J. GREIDER & W. BEADLES, LAW AND THE LIFE INSURANCE CONTRACT 439 (1974); see 28 TAC § 3.8112 (defining "cash surrender value" for purposes of regulating variable life insurance contracts); BLACK'S LAW DICTIONARY 197 (5th ed. 1979) (defining "cash surrender value" and "cash value option"). Throughout the remainder of this opinion, we use the term "cash value" with the understanding that it is equivalent to "present value," as section 42.002 of the Property Code uses "present value," and "cash surrender value."

We note that sections 42.001 and 42.002 do not provide any exemption for life insurance policy proceeds; they exempt only the cash value of the life insurance policy. On the other hand, article 21.22 expressly exempts life insurance policy proceeds. Thus, the two codes do not conflict on the matter of whether proceeds are exempt from seizure; article 21.22 unquestionably provides that they are wholly exempt. We therefore proceed to consider whether the cash value of a life insurance policy is likewise wholly exempt.

Prior to amendment by Senate Bill 1261, article 21.22 of the Insurance Code exempted from seizure under process "money or benefits of any kind to be paid or rendered to the insured or any beneficiary" under any life insurance policy. Acts 1987, 70th Leg., ch. 5, § 1, at 22. In 1988, the United States Bankruptcy Court for the Northern District of Texas interpreted the former language from article 21.22, section 1 to exempt from seizure only proceeds paid to the policy beneficiaries, not cash surrender values. In re Brothers, 94 B.R. 82, 83 (Bankr. N.D. Tex. 1988). Consequently, according to the Brothers court, cash surrender values were exempt under section 42.002(7) of the Property Code (now section 42.002(12)) only to the extent that they did not cause the value of the debtor's total claimed exemptions to exceed the aggregate amounts allowed by section 42.001 of the Property Code.

Subsequent to the Brothers decision, the legislature amended article 21.22, section 1 expressly to exempt the cash value, as well as the proceeds, of any life insurance policy. The legislature made clear its intent in enacting the amendments to article 21.22. The legislature proposed and enacted Senate Bill 1261 to provide an "unlimited exemption from seizure of certain life . . . insurance benefits." Senate Comm. on Economic Dev., Bill Analysis, S.B. 1261, 72d Leg. (1991). Furthermore, the legislature was keenly aware of the limitation the Property Code placed on proceeds and cash values of life insurance, and intended that article 21.22 of the Insurance Code override the Property Code's limitations on exemptions. See Hearings on S.B. 1261 Before the Senate Economic Dev. Comm., 72d Leg. 1 (Apr. 25, 1991) (statement of Senator Parker) (stating that proposed amendments to article 21.22 remove limitation that restricted exemption from seizure for life insurance benefits) (transcript on file with Texas Senate Staff Services); Hearings on S.B. 1261 Before the Senate Economic Dev. Comm., Subcomm. on Ins., 72d Leg. 1 (Apr. 15, 1991) (statement of Senator Harris, sponsor of S.B. 1261) (stating that proposed amendments to article 21.22 would clarify article so that insurance policy benefits "could not be subject to any caps") (transcript on file with Texas Senate Staff Services); id. (statement of Dean Davis, Texas Association of Life Underwriters) (stating that existing article 21.22 "runs afoul of . . . what is exempt in the Property Code when it comes to bankruptcy"). The legislature also was aware of bankruptcy situations, such as the situation in Brothers, in which creditors would attempt to cap, pursuant to sections 42.001 and 42.002 of the Property Code, the amount of life insurance proceeds and cash values exempted from seizure. See id. (statement of Senator Harris); id. (testimony of Dean Davis). In accordance with the legislature's express intent, we construe the total exemption provided for the cash value of a life insurance policy in article 21.22, section 1 of the Insurance Code to prevail over the limited exemption provided in sections 42.001 and 42.002 of the Property Code.[5] Life insurance proceeds and cash values thus are wholly exempt from seizure under process.

[5] Incidentally, we note that to the extent of any irreconcilable conflict between sections 42.001 and 42.002 of the Property Code and article 21.22 of the Insurance Code, article 21.22 of the Insurance Code more specifically pertains to cash values. See Gov't Code § 311.026 (stating that special provision prevails over general provision in event of irreconcilable conflict); Attorney General Opinion JM-1137 (1990) at 3 (same). Furthermore, the legislature adopted Senate Bill 1261, amending article 21.22 of the Insurance Code, after Senate Bill 654, amending sections 42.001 and 42.002 of the Property Code. See Attorney General Opinion JM-1137 (1990) at 4 (stating that statute latest in enactment prevails).

In your second question, you ask whether article 21.22 of the Insurance Code exempts from seizure under process individually purchased annuities. You note, as background, that the exemption in article 21.22 "specifically includes benefits under any plan or program of annuities and benefits in use by any employer" but omits a reference to individually purchased annuities. See Ins. Code art. 21.22, § 1. We note that Senate Bill 1261's proposed amendments to article 21.22 never included a proposal to exempt from seizure individually purchased annuities. Additionally, we find no legislative history indicating that the legislature ever discussed, in the context of Senate Bill 1261, providing complete exemption for individually purchased annuities.[6] In our opinion, these facts conclusively indicate that the legislature intentionally excluded individually purchased annuities from the exemption provided in article 21.22.

[6] Interestingly, Senate Bill 654, which amended sections 42.001 and 42.002 of the Property Code, originally provided a total exemption from seizure to the "proceeds of any life, health, or accident insurance, or annuity policy either before or after being paid . . . to the beneficiary, a member of the family or a dependent of an insured person." See Hearings on S.B. 654 Before the Senate Jurisprudence Comm., 72d Leg. 3 (Mar. 26, 1991) (testimony of Laura Smreker, Texas Bankers Ass'n) (transcript on file with Texas Senate Staff Services). She testified that the proposed unlimited exemption of proceeds from annuity policies would provide "some opportunities for debtors to take otherwise non-exempt property . . . and convert those into exempt property that is exempt without limitation. . . . It is already extremely difficult to collect unsecured debt in this state and we're very concerned that providing these temptations to debtors to convert property in this manner is going to leave the reality that there's [going to] be virtually no assets available to pay unsecured debt if the debtor . . . defaults on his loans and is unable to pay." Id. at 3-4. Ms. Smreker's testimony generated a number of questions from the Committee Chair, Senator Green. See id. at 4-5.

                                     SUMMARY

      Article 21.22 of the Insurance Code wholly exempts from seizure under process life insurance proceeds and cash values. The complete exemption provided by article 21.22 prevails over the limited exemption provided to the cash value of a life insurance policy under sections 42.001 and 42.002 of the Property Code. Article 21.22 of the Insurance Code does not exempt from seizure under process individually purchased annuities.

                                            DAN MORALES
                                            Attorney General of Texas

WILL PRYOR
First Assistant Attorney General

MARY KELLER
Deputy Assistant Attorney General

RENEA HICKS
Special Assistant Attorney General

MADELEINE B. JOHNSON
Chair, Opinion Committee

Prepared by Kymberly Oltrogge
Assistant Attorney General