When all you want to do is protect your family with life insurance and bankruptcy has slowed you down in the past, you may be wondering what type of an affect this can have when you apply.
Is bankruptcy going to be discovered if you apply? Yes.
Can it affect your possible approval? Maybe.
While each situation is unique, there are different types of bankruptcies and they have different consequences on your long term financial status. There are also different reasons people file for bankruptcy, and this matters as well.
Life Insurance And Bankruptcy
Bankruptcy can be a dreadful time in your life. Not only is a feeling of complete loss, but it’s coupled with years of climbing an uphill battle to recover what you once had. The ramifications can last years, if not a decade or more, and your personal finances can suffer in many different lights.
Life insurance and bankruptcy are perhaps one of those things, although not for everyone. There are different kinds of ways to file for bankruptcy, and you are probably familiar with the terms Chapter 7 , Chapter 11 and Chapter 13. (There are other types, but not extremely pertinent to our conversation at this time.)
Let’s brief those real quick so you understand each independently and can get a better idea of how life insurance and bankruptcy cross paths.
Chapter 7 Bankruptcy
This is perhaps the fastest way to get through a bankruptcy. It’s also known as the straight bankruptcy, meaning it’s a liquidation of value from your bankruptcy estate. Essentially, you’ve filed bankruptcy and understand you owe what you owe up to the exemption amounts.
Chapter 11 Bankruptcy
This form of bankruptcy is commonly known as “reorganization” to most, as it allows the debts to be repaid, while a strict monitor of assets and cash flow is enforced. It’s used for businesses or even an individual with a large amount due, but one who wishes to try to move forward while systematically paying off the obligations.
Chapter 13 Bankruptcy
This type of bankruptcy is a format for someone who has some type of regular income, but their debts are too much to manage based on this income alone. The earner is allowed to rehabilitate themselves through payments which are strict and enforced. This does allow the earner to keep moving forward, much like Chapter 11.
So let’s talk about life insurance and bankruptcy specifically if you’ve identified with one of the above.
First, if you are currently in filing for bankruptcy and there is no clearing, discharge or settlement of the bankruptcy estate, you are probably going to need to wait until after it has in order to apply.
Second, if you filed Chapter 7 specifically, you are going to need to wait an additional 360 days afterwards before you can apply.
There are several reasons life insurance companies see this as an issue:
Life insurance and bankruptcy is really not a money matter. As you can see, your ability to pay is not in question. Most people think this is what matters most, when in fact, it’s the least questioned item typically. If you think about it, if you paid your premiums for a while then defaulted on your life insurance policy before you passed, the insurance company profited without paying out. This is a win-win for them.
Where it will make a difference is how much coverage you may be offered. If your income is less because of the bankruptcy, this could limit the maximum amount of death benefit you could be eligible to purchase. Insurance carriers have a limit to the amount of coverage you can buy based on income alone. (There are some exceptions to this.)
So let’s go back and clear the air of the new heightened risks associated with bankruptcy and applying for life insurance.
Depression can be considered a high risk life insurance category, and those who have filed bankruptcy are more likely to either be depressed now or develop a level of depression following the bankruptcy. This can have long-term effects, and therefore will increase your perceived risk to the insurance company.
It goes without saying that possible suicide would impact the risk a carrier takes on when issuing life insurance policies, so this added risk will add cost to the policy you receive. In addition, most life policies have a suicide clause, barring payout if a person commits suicide in the first couple years of an insurance policy.
If you would like to know more about impaired risk life insurance, we can help.
Steps For Life Insurance And Bankruptcy
- Wait a year if you went through Chapter 7
- Bring up your bankruptcy to your agent when you apply
- Have dates of your filings and discharge handy
- Understand your current budget
Each insurance carrier will see life insurance and bankruptcy in a different light, so by telling us up front of any bankruptcies you’ve been through, we can find the best life insurance company for you. Remember, a bankruptcy can stick with you for 10 years or longer, so make sure to tell us no matter how long ago it may have been.
If you already have coverage and you’re wondering how your bankruptcy might affect your in-force coverage, there are two things to consider:
- Whole (or Universal)
If you already have a term policy, filing for bankruptcy will do nothing. You can keep what you have, as long as you make your payments. There is no cash value inside of the policy, and the only value is in its maturity, which means you already died.
If you own a universal or whole life insurance product, there may be cash value inside of the policy. This CAN be assessed up to a certain point, or entirely. Contact a legal professional in YOUR STATE for rules, regulations and life insurance exemptions.
If you have any further questions, please contact us and we’ll be happy to assist you. Life insurance and bankruptcy are both serious in nature, so take action accordingly.
Perhaps your concern is with health conditions or maybe you’re searching for life insurance during pregnancy; our professionals can help you today no matter the circumstances.