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Constitution of North Carolina

ARTICLE X Homesteads and Exemptions

Sec. 5. Insurance.

A person may insure his or her own life for the sole use and benefit of his or her spouse or children or both, and upon his or her death the proceeds from the insurance shall be paid to or for the benefit of the spouse or children or both, or to a guardian, free from all claims of the representatives or creditors of the insured or his or her estate. Any insurance policy which insures the life of a person for the sole use and benefit of that person's spouse or children or both shall not be subject to the claims of creditors of the insured during his or her lifetime, whether or not the policy reserves to the insured during his or her lifetime any or all rights provided for by the policy and whether or not the policy proceeds are payable to the estate of the insured in the event the beneficiary or beneficiaries predecease the insured.

(1977, c. 115, s. 1.)

History Note. - The provisions of this section are similar to those of Art. X, § 7, Const. 1868, as amended in 1932.

Legal Periodicals. - For article on debtors' exemption rights under the Bankruptcy Reform Act, see 58 N.C.L. Rev. 769 (1980).

For article on the rights of individuals to control the distributional consequences of divorce by private contract and on the interests of the State in preserving its role as a third party to marriage and divorce, see 59 N.C.L. Rev. 819 (1981).


Editor's Note. - Most of the cases cited below were decided under former Art. X, § 7, Const. 1868, before and after amendment.

Purpose. - The purpose of this section is to enable the husband (spouse) to make valuable provision for his wife (spouse) and children after his death, above, beyond and unaffected by his estate, personal and real, and the conditions of the same remaining at the time of his death. Burwell v. Snow, 107 N.C. 82, 11 S.E. 1090 (1890).

Certain Insurance Proceeds Not Part of Insured's Estate. - Where a life insurance policy is issued to an individual in the name and for the benefit of the wife (spouse) and children, it does not upon his death become a part of his estate. Burton v. Farinholt, 86 N.C. 260 (1882).

Under this section the proceeds from insurance policy payable to the wife (spouse) and children are not a part of the insured's estate so that they may be claimed by an heir or next of kin. Burwell v. Snow, 107 N.C. 82, 11 S.E. 1090 (1890).

Wives (spouses) and children of bankrupts are protected from claims of the bankrupt's creditors, both during his life and at his death, if life insurance policies are for their sole benefit. In re Wolfe, 249 F. Supp. 784 (M.D.N.C. 1966), commented on in 45 N.C.L. Rev. 696 (1967).

Protection Is Personal to Survivors. - This section clearly looks to provision for the wife (spouse) and children so that they may not be left destitute by the death of an insolvent husband and father (spouse and parent) and is personal to them when they survive. Hooker v. Sugg, 102 N.C. 115, 8 S.E. 919 (1889).

Cash Surrender Value of Whole Life Insurance Policy Not Exempt. - Cash surrender value of a whole life insurance policy a debtor owned at the time he declared Chapter 7 bankruptcy was not exempt from creditors' claims under N.C. Const., Art. X, § 5 and G.S. § 1C-1601 because the debtor's ex-wife was named as one of the beneficiaries; although the policy also named three of the debtor's children as beneficiaries, N.C. Const., Art. X, § 5 treated the policy as a whole unit, and the debtor was not allowed under § 5 to claim that seventy-five percent of the cash surrender value was exempt from creditors' claim because § 5 protected his children's interests. In re Forgione, - Bankr. - (Bankr. M.D.N.C. Sept. 12, 2014).

Exemption of Cash Value Allowed. - Debtors could exempt the cash value in their life insurance policies as the beneficiaries were testamentary trusts in favor of the other spouse (S) and then their son and the testamentary trustees' (TT) abilities to compromise claims, to use trust funds to make loans to and buy property from S's executors or trustees and to pay agents and professionals was restricted to the sole use and benefit of S and the son and did not allow the TTs to compromise claims against the insureds; the wills directed the TTs to expend income and principal for the health, maintenance and support of S and then to their son, which was close enough to restricting the TTs' abilities to apply the insurance funds to the sole use and benefit of the beneficiaries. In re Foley, - Bankr. - (Bankr. W.D.N.C. Sept. 7, 2016).

Treatment of Insurance Proceeds When Received by Beneficiary. - Upon filing a bankruptcy petition, a debtor can claim as exempt the value of life insurance policy. There is no provision, however, that extends the protection of the life insurance exemption to the beneficiary of the policy once the proceeds are in the beneficiary's hands. The proceeds are treated like any other asset of the beneficiary and are available to his creditors, except to the extent that an exemption or other protection is available to the beneficiary in his own right under applicable law. The result is no different where the beneficiary is the codebtor of the insured in a joint bankruptcy case. Butler v. Sharik, 41 Bankr. 388 (Bankr. E.D.N.C. 1984).

Where debtor wife died and debtor husband received life insurance proceeds prior to completion of their Chapter 13 plan, trustee's motion to modify their plan to require debtor husband to pay a lump sum sufficient to pay allowed unsecured debts that were either joint debts or in debtor's name only was granted. Trustee did not seek to pay debtor wife's debts with the proceeds because under North Carolina law, those proceeds were paid to the beneficiaries free from all claims of her creditors. In re Evans, - Bankr. - (Bankr. E.D.N.C. Jan. 5, 2015).

Trust Authorizing Payment to Decedent's Unsecured Creditors. - Providing for one's spouse, children, or both through a trust as beneficiary of a life insurance policy does not in and of itself categorically violate the terms of N.C. Const., Art. X, § 5, so long as the trust complies with the purposes underlying the exemption. However, where a trust authorizes payments to the unsecured creditors of the decedent, who would otherwise have been barred from accessing such funds by the protection offered under § 5, such a trust exceeds the boundaries of "sole use and benefit" contemplated by that provision. In re Foster, - Bankr. - (Bankr. E.D.N.C. Nov. 1, 2011).

Life insurance policies were not exempt under G.S. § 1C-1601(a)(6) and N.C. Const., Art. X, § 5, because the trust that was the beneficiary of the policies authorized the trustee to make payments to the unsecured creditors of the decedent from the insurance proceeds. In re Foster, - Bankr. - (Bankr. E.D.N.C. Nov. 1, 2011).

Trust Referencing Only "Claims Against the Estate." - In the instant case, the trust did not distinguish between types of creditors and instead references only "claims against the estate," but this was more than enough to illustrate that the proceeds were not "for the sole use and benefit of (the policy owner's) spouse or children or both," such that the exemption was not applicable. In re Eshelman, - Bankr. - (Bankr. E.D.N.C. May 30, 2012).

Applied in First Nat'l Bank v. Dixon, 38 N.C. App. 430, 248 S.E.2d 416 (1978).

Cited in In re Ragan, 64 Bankr. 384 (Bankr. E.D.N.C. 1986); HFC v. Ellis, 107 N.C. App. 262, 419 S.E.2d 592 (1992), cert. granted, 333 N.C. 167, 424 S.E.2d 909 (1992).


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