In the 1920 case of Frederick, Trustee in Bankruptcy of Schmidt, v. Fidelity Mutual Life Insurance Company of Philadelphia, the United States Supreme Court addressed a dispute over insurance policy payouts following bankruptcy. The trustee for Mr. Schmidt's bankruptcy estate argued that an insurance payout should be included in the bankrupt estate and therefore available to pay off creditors. However, Fidelity Mutual Life Insurance Company contended that because Mr. Schmidt had named his wife as beneficiary on his life insurance policies before he declared bankruptcy, those funds were not part of the bankrupt estate and thus could not be used to satisfy debts owed by it. The court ruled in favor of Fidelity Mutual Life Insurance Company stating that under Pennsylvania law (where this case was originated), when a person names their spouse as beneficiary on an insurance policy prior to declaring bankruptcy, those proceeds are exempt from being considered part of the debtor’s property or assets during proceedings related to insolvency or receivership unless there is evidence indicating fraud.

In the dissenting opinion for Frederick v. Fidelity Mutual Life Insurance Company of Philadelphia, Justice Holmes argued that a life insurance policy should not be considered an asset in bankruptcy proceedings if it has no cash surrender value. He reasoned that such policies are essentially contracts to pay money upon death and do not have any present or future value unless they can be sold or borrowed against. Therefore, he believed these types of policies should not be included in the bankrupt's estate because they cannot provide any immediate financial relief to creditors. Furthermore, he pointed out that including them could potentially harm the insured's dependents by depriving them of their expected benefits upon his death.