How does declaring bankruptcy affect your life insurance?
If you’re filing for bankruptcy or considering bankruptcy, you probably feel a mix of conflicting emotions. You might be worried about your future, aggravated by the circumstances forcing you to file for bankruptcy, or even relieved to finally have a plan for paying off your debt.
You may be wondering if you can get life insurance if you’re bankrupt, or what declaring bankruptcy might mean for an existing policy.
While buying life insurance after bankruptcy is possible, managing a current policy during bankruptcy proceedings can become complicated. Keep reading to learn more about bankruptcy and how it works with current and future life insurance policies.
Does bankruptcy mean you can’t buy life insurance?
No. That said, it might become difficult. This is because insurers consider your financial status and history when deciding whether to issue a policy, and many insurers might not offer a policy to someone in bankruptcy. Those who will offer a policy will likely offer you higher premium rates than someone else of comparable age and health.
Something else to consider is that your available assets will be put in service of a repayment plan, which might leave you without the money to pay for a new policy.
Are life insurance policies subject to seizure in bankruptcy?
When you file for bankruptcy, your assets are evaluated to determine what you can use to repay your debts. Life insurance policies are typically considered assets in bankruptcy proceedings, but it depends on your policy type and the laws in your state. If it’s possible for creditors to use your policy as a way of collecting funds, they may use your life insurance as a portion of assets to pay off your debts.
Term life insurance policies typically have no cash value and are considered protected assets. This means they cannot be used to repay creditors in bankruptcy. Additionally, if you have named a beneficiary on your policy, the payout to the beneficiary is not considered part of your bankruptcy estate and cannot be used to repay your debts.
On the other hand, permanent life insurance policies, such as whole or universal life insurance, do have a cash value component. In other words, you can borrow or withdraw money from the policy while you are still alive. In a bankruptcy case, creditors may consider the cash value of a permanent life insurance policy as an asset and use it for repayment. However, the total amount that can end up going toward repaying your debts will depend on the exemptions available in your state and the amount of cash value in the policy.
Life insurance options after a bankruptcy
If you’ve filed for bankruptcy in the past, you might be concerned that you can’t buy a life insurance policy in the future. Thankfully, this is not usually the case. You typically can purchase life insurance after bankruptcy — however, your options and cost of coverage may be affected by your bankruptcy filing.
When you apply for life insurance, the insurer will typically ask you about your financial history, including whether you have filed for bankruptcy. If you have filed for bankruptcy, it could impact the life insurer’s decision to offer you coverage and the cost of the coverage.
In some cases, a bankruptcy filing may result in higher premiums for life insurance, especially if the filing was recent. This is because the insurer may view bankruptcy as an indication of financial instability and thus consider you a higher risk.
Bankruptcy’s impact on your ability to buy life insurance and the cost of the coverage will depend on several factors, including:
The type of bankruptcy you filedThe amount of debt you dischargedThe amount of time that has passed since the bankruptcyYour overall financial situation
You might also be required to take a medical exam and provide your medical history when buying a new life insurance policy — even if the policy wouldn’t require such information from individuals without bankruptcy in their history. This added measure helps the insurance agency further investigate your risk. Poor health combined with a previous bankruptcy may exclude you from coverage.
If you’ve made financial mistakes in the past, a term life insurance policy will likely be your most affordable route to new coverage. Term life insurance policies have lower premiums than whole life policies because they generally cover the years when you’re younger and healthier, as opposed to whole life policies that remain in place until you die.
To learn more, and to begin your path toward a more secure financial future, consider getting a free online life insurance quote from Haven Life today.
