Finder is committed to editorial independence. While we receive compensation when you click links to partners, they do not influence our opinions or reviews. Learn how we make money.

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.

Updated

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.

What to do if you’re declaring bankruptcy

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.

Protect your loved ones
This life insurance broker combines technology and the human touch to match you with a policy tailored to your needs.

Need help? Talk to a customer specialist

X

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.

  1. Life insurance is cheaper to buy when you’re young and healthy.
  2. You might not be able to buy a new policy right away.
  3. Your rates may go up, since you’ll be seen as a higher risk.
  4. 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.

InsurerChapter 7 bankruptcyChapter 13 bankruptcyChapter 11 bankruptcy
AIGMay offer coverage once your bankruptcy has been discharged for 24 monthsMay offer coverage once your bankruptcy has been discharged for 24 monthsMay offer coverage once your bankruptcy has been discharged for 24 months
John HancockMay offer coverage once your bankruptcy has been discharged for 24 monthsMay offer coverage once your bankruptcy has been discharged for 24 monthsMay offer coverage on a case-by-case basis
Legal & GeneralMay offer coverage after discharge — if you can prove you have strong financialsWill consider approving you for coverage if you have strong financials and a solid repayment planWill consider approving you for coverage if you have strong financials and a solid repayment plan
Lincoln NationalMay offer coverage once your bankruptcy has been discharged for 24 monthsWill consider approving you for coverage if you have strong financials and a solid repayment planMay offer coverage once your bankruptcy has been discharged for 24 months
Protective LifeMay offer coverage once your bankruptcy has been discharged for 24 monthsWill consider approving you for coverage 12 to 24 months after your reorganization plan has been approvedMay 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.

Bottom line

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.

To compare your options now, review our life insurance guide and find out what kind of policy best fits your needs.

Name Product Issue age Minimum Coverage Maximum Coverage Medical Exam Required
Sproutt
18 - 60 years old
$50,000
$10,000,000
No
This life insurance broker combines technology and the human touch to match you with a policy tailored to your needs.
Policygenius
18 - 85 years old
$50,000
$10,000,000
Depends on provider and policy
Compare affordable quotes from 12+ A-rated life insurance companies side-by-side.
Bestow
21 - 54 years old
$50,000
$1,000,000
No
Affordable 10- and 20-year term life insurance policies with instant quotes and no medical exams.
Everyday Life
20 - 75 years old
$100,000
$10,000,000
No
Build a customized laddering strategy to target specific financial responsibilities and save on term life.
Fabric
25 - 60 years old
$100,000
$5,000,000
Depends on policy
Get affordable term life insurance with accelerated underwriting or no-exam coverage up to $1,000,000. Available in all states except CA, NY and MT.
loading

Compare up to 4 providers

Ask an Expert

You are about to post a question on finder.com:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder.com provides guides and information on a range of products and services. Because our content is not financial advice, we suggest talking with a professional before you make any decision.

By submitting your comment or question, you agree to our Privacy and Cookies Policy and finder.com Terms of Use.

Questions and responses on finder.com are not provided, paid for or otherwise endorsed by any bank or brand. These banks and brands are not responsible for ensuring that comments are answered or accurate.
Go to site