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Life insurance and bankruptcy
Your existing policy may be safe — but you might want to hold off if you're shopping for a new one.
The way life insurance is handled during bankruptcy proceedings varies by the type of policy you have and the state where you live. For advice specific to your case, seek out legal guidance.
What happens to my life insurance policy if I file for bankruptcy?
One of two things can happen to life insurance when you file for bankruptcy: Your policy remains in place as is, or you lose a portion of its cash value — if it has one.
Term life insurance policies typically don’t have a cash value component, and are therefore usually aren’t affected when you file for bankruptcy. As long as you continue making premium payments, your coverage will likely remain the same.
Permanent life insurance can have a cash value component. If you have a whole life or permanent policy that builds cash value over time, you may lose access to part of it.
Why a permanent life insurance policy may be seized during bankruptcy
Permanent life insurance can be viewed as an asset if you’ve built up its cash value. Bankruptcy takes all of your assets into account when assessing your finances, which includes any money you have access to, just like a 401k or a CD.
The death benefit isn’t something you can access while you’re alive, so it doesn’t count as an asset that can be taken to pay back creditors. However, if you’re the beneficiary of a life insurance policy death benefit and then file for bankruptcy, those funds may be considered an asset, depending on when the person died and when you filed for bankruptcy.
While it varies among states, it’s possible the cash value of your policy will be considered a means to pay back creditors. Exemptions exist, but they’re also not consistent across all states. Talk with an attorney if you’re unsure of how your specific policy would be affected.
Should I keep my policy while I’m filing for bankruptcy?
If you can afford it and you still have a need for your policy, you might consider keeping it for a few reasons.
- Life insurance is cheaper to buy when you’re young and healthy.
- You might not be able to buy a new policy right away.
- Your rates may go up, since you’ll be seen as a higher risk.
- If you passed away, your family might need some financial help to recover from both the bankruptcy and your passing.
Can I get life insurance after declaring bankruptcy?
Purchasing life insurance directly after filing for bankruptcy may come with increased rates, or you might be denied for a certain period.
Life insurance providers assess all types of risks when offering products, including financial risk. Bankruptcy on your file will typically mark you as a higher financial risk, resulting in higher premiums. While you can still apply for life insurance right after filing, you may get better rates by waiting and building your finances back up.
According to MyFICO, once you complete Chapter 7 bankruptcy, it stays on your credit report for up to 10 years. Chapter 13 bankruptcy stays for up to seven years. While you don’t necessarily have to wait the whole time before buying a new policy, it’ll continue playing a role in the underwriting process for most providers.
Will bankruptcy affect my life insurance premiums?
Most likely. If you have a bankruptcy on your record, your insurer may charge you a higher rate to compensate for the financial risk they’re assuming.
To lower your rates, try to wait a year or two after discharging your bankruptcy before applying for a long-term life insurance policy. Then, be prepared to prove you have the income and assets to justify the amount of coverage you’re buying.
Does the type of bankruptcy I file for make a difference?
Yes. Insurers will handle your case based on your bankruptcy status, and certain types of bankruptcy will make it easier to get life insurance.
These are the general rules:
- Chapter 7 bankruptcy is the most serious type, and insurers will typically decline your application until your bankruptcy has been discharged for 12 to 24 months.
- Chapter 13 bankruptcy involves shuffling around your assets to pay creditors (and avoid liquidating them). Since it’s not as severe, you may be able to successfully apply for coverage before your bankruptcy has been discharged.
- Chapter 11 bankruptcy applies to businesses, and it’s usually treated in the same way as Chapter 12 bankruptcy. In short, you’ll probably be able to get coverage if you can prove you have strong financials.
How major life insurers handle bankruptcy
Here’s an idea of how 5 life insurers treat applicants who have filed for bankruptcy. For the most up-to-date information, contact the companies directly — and be sure to compare quotes from a few companies to get the best possible policy.
|Insurer||Chapter 7 bankruptcy||Chapter 13 bankruptcy||Chapter 11 bankruptcy|
|AIG||May offer coverage once your bankruptcy has been discharged for 24 months||May offer coverage once your bankruptcy has been discharged for 24 months||May offer coverage once your bankruptcy has been discharged for 24 months|
|John Hancock||May offer coverage once your bankruptcy has been discharged for 24 months||May offer coverage once your bankruptcy has been discharged for 24 months||May offer coverage on a case-by-case basis|
|Legal & General||May offer coverage after discharge — if you can prove you have strong financials||Will consider approving you for coverage if you have strong financials and a solid repayment plan||Will consider approving you for coverage if you have strong financials and a solid repayment plan|
|Lincoln National||May offer coverage once your bankruptcy has been discharged for 24 months||Will consider approving you for coverage if you have strong financials and a solid repayment plan||May offer coverage once your bankruptcy has been discharged for 24 months|
|Protective Life||May offer coverage once your bankruptcy has been discharged for 24 months||Will consider approving you for coverage 12 to 24 months after your reorganization plan has been approved||May approve coverage once your bankruptcy has been discharged for 12 months.|
What kind of life insurance policy should I consider post-bankruptcy?
While your rates will likely be affected, they might not remain higher than when you filed. Depending on your family’s needs, you may want to consider a short-term life insurance policy to get you from after you’ve claimed until when your rates even out.
Coverage you can reasonably afford is still going to be key. Make sure the policy you’re seeking has an amount that meets your family’s needs and remains within your budget.
How bankruptcy affects your life insurance policy will change based on the type of plan you have and where you live. And though you can still find a provider after you file, it may not be at the best rate.
Compare life insurance quotes
To compare your options now, review our life insurance guide and find out what kind of policy best fits your needs.
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