§ 95.13 — Other [Necessary] Expenses—Life Insurance

Revised: March 5, 2009

[1]

The ninth of 161 categories of Other [Necessary]2 Expenses specified by the IRS3 is “Life Insurance.”4 A Chapter 13 debtor with current monthly income (CMI)5 greater than applicable median family income6 is allowed a deduction for actual monthly expenses in the category Life Insurance as part of the calculation of disposable income under § 1325(b)(2) and (3).7

[2]

Life Insurance should be a simple, straightforward category of potential expenses for Chapter 13 debtors. The Bankruptcy Code limits life insurance expenses to “the debtor, the dependents of the debtor, and the spouse of the debtor in a joint case, if the spouse is not otherwise a dependent.”8 There is no limitation in the Bankruptcy Code with respect to the size of the life insurance policy or with respect to the kind of policy—term insurance, “whole life” or the many other products offered by the life insurance industry. A Chapter 13 debtor with CMI greater than applicable median family income who has actual expenses for life insurance should be allowed a deduction in the amount of those actual expenses in the disposable income calculation.

[3]

Courts tempted to look into the Internal Revenue Manual for interpretation of the Life Insurance category of Other [Necessary] Expenses9 will find the following cryptic instruction to revenue agents: “If it is a term policy on the life of the taxpayer only.”10 This Treasury Department limitation on the allowance of life insurance expenses in a negotiation with a delinquent taxpayer is inconsistent with the Bankruptcy Code. As quoted above, the Bankruptcy Code allows an expense for insurance on the life of the debtor, the dependents of the debtor and the spouse of the debtor—either in a joint case or when the debtor’s spouse is also a dependent. The “term policy” and “taxpayer only” limitations in the Internal Revenue Manual appear nowhere in the Bankruptcy Code.

[4]

Digging further into the Internal Revenue Manual produces the following “Note[]/Tip[]” with respect to the category of Other [Necessary] Expenses for Life Insurance: “If there are whole life policies, these should be reviewed as an asset for borrowing against or liquidating. Life insurance used as an investment is not a necessary expense.”11 This distinction—between life insurance that accumulates value and a “term policy” that presumably does not—again is a product of Treasury Department analysis that does not appear in the Bankruptcy Code.

[5]

Especially after enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA),12 the Bankruptcy Code allows Chapter 13 debtors with CMI greater than applicable median family income to deduct expenses that create value (assets). For example, there are now explicit statutory protections for pension and retirement contributions13 and for the repayment of loans from a debtor’s own pension plan.14 In much the same sense that retirement contributions provide a source of future income for a debtor and the debtor’s family, life insurance provides for the debtor and the debtor’s family in the event of death. A life insurance policy is no more or less an “investment” or “asset” than a portfolio of stocks or bonds in a retirement account. The IRS limitation to term life insurance is not supported by the Bankruptcy Code or by any compelling policy after BAPCPA.

[6]

Life Insurance is one of the few categories of Other [Necessary] Expenses that will rarely overlap any other category of expenses allowed a debtor with CMI greater than applicable median family income. There will be circumstances when a debtor is required to maintain life insurance as part of a domestic relations order from a state court. That obligation could be a “Court-Ordered Payment” for purposes of the fourth category of Other [Necessary] Expenses discussed above.15 Life insurance included in a domestic support obligation (DSO)16 would be entitled to priority and would be separately deductible within the disposable income test under § 707(b)(2)(A)(iv) (divided by 60).17

[7]

Official Form B22C addresses the Life Insurance category of Other [Necessary] Expenses at Line 32:

Other Necessary Expenses: life insurance. Enter total average monthly premiums that you actually pay for term life insurance for yourself. Do not include premiums for insurance on your dependents, for whole life or for any other form of insurance.
[8]

The forms drafters have obviously embraced the Internal Revenue Manual interpretation of the Life Insurance category of Other [Necessary] Expenses. The limitations in the instruction above with respect to “term” life insurance and “yourself” and the explicit exclusion of insurance on the debtor’s dependents or for whole life or other forms of insurance have no foundation in the Bankruptcy Code. The exclusion of life insurance on the debtor’s dependents at Line 32 is explicitly inconsistent with § 707(b)(2)(A)(ii)(I). It is not obvious why the forms drafters chose the Treasury Department’s interpretation over the plain language of the Bankruptcy Code.

[9]

Without critical analysis, one bankruptcy court has approved the limitations in the Internal Revenue Manual as translated at Line 32 of Official Form B22C. In In re Lara,18 the bankruptcy court observed that $224.79 per month for term life insurance was an allowed expense for a Chapter 13 debtor with CMI greater than applicable median family income because there was evidence that this was the actual amount spent on life insurance and the policy was the correct life insurance type.


 

1  Prior to May 9, 2008, the IRS specified 16 categories of Other [Necessary] Expenses in the Internal Revenue Manual. See I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965. The May 9, 2008, version of the Internal Revenue Manual eliminated the “Health Care” category of Other [Necessary] Expenses, leaving only 15 categories. See I.R.M. 5.15.1.10 (May 9, 2008), discussed in §§ 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories and 477.8 [ Other [Necessary] Expenses—Health Care ] § 95.11  Other [Necessary] Expenses—Health Care.

 

2  The word “Necessary” is in brackets because there is no such thing as a category of Other Necessary Expenses specified by the IRS as contemplated by 11 U.S.C. § 707(b)(2)(A)(ii)(I). There are categories of Other Expenses specified by the IRS, but the “Necessary” part of that phrase appears only in the Bankruptcy Code and is not specified by the IRS. See § 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

3  See § 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

4  I.R.M. 5.15.1.10 (May 9, 2008). The specification of this category of Other [Necessary] Expenses by the IRS was the same prior to May 9, 2008. See I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965.

 

5  See 11 U.S.C. § 101(10A), discussed in § 468.1 [ Current Monthly Income: The Baseline ] § 92.3  Current Monthly Income: The Baseline.

 

6  See § 469.1 [ Comparison of CMI to Applicable Median Family Income: § 1325(b)(3) ] § 92.4  Household Size and Comparison of CMI to Median Family Income: § 1325(b)(3).

 

7  See § 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

8  11 U.S.C. §  707(b)(2)(A)(ii)(I), discussed in § 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

9  There are many good reasons why consulting the Internal Revenue Manual to interpret expense deductions in Chapter 13 cases is a bad idea. See §§ 471.1 [ Big Picture: Too Many Issues ] § 94.1  Big Picture: Too Many Issues, 475.1 [ National Standards ] § 95.2  National Standards, 476.1 [ Local Standards: Housing and Transportation ] § 95.3  Local Standards: Housing and Transportation and 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

10  I.R.M. 5.15.1.10 (May 9, 2008). See also I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965.

 

11  I.R.M. 5.15.1.10 (May 9, 2008). See also I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965.

 

12  Pub. L. No. 109-8, 119 Stat. 23 (2005).

 

13  See 11 U.S.C. § 541(b)(7), discussed in §§ 403.1 [ Property of the Chapter 13 Estate—New Ins and Outs ] § 46.2  Property of the Chapter 13 Estate—Changes by BAPCPA and 492.1 [ Employee Benefit Plan Contributions ] § 99.5  Employee Benefit Plan Contributions.

 

14  See 11 U.S.C. § 1322(f), discussed in § 491.1 [ Pension Loan Repayments ] § 99.4  Pension Loan Repayments.

 

15  See § 477.5 [ Other [Necessary] Expenses—Court-Ordered Payments ] § 95.8  Other [Necessary] Expenses—Court-Ordered Payments.

 

16  See 11 U.S.C. § 101(10A), discussed in §§ 99.1 [ What Claims Are Priority Claims? ] § 73.2  What Claims Are Priority Claims?, 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA and 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA.

 

17  See § 486.1 [ Total Priority Debts and Divide by 60 ] § 97.1  Total Priority Debts and Divide by 60.

 

18  347 B.R. 198 (Bankr. N.D. Tex. 2006).