If I declare bankruptcy, what happens to my life insurance policy? To start with, life insurance might not be the first thing you think of when dealing with bankruptcy. However, it is a factor that can impact your case.
Each policy has three roles: the owner, who controls the policy and can make changes; the insured, whose death triggers the payout; and the beneficiary, who receives the proceeds. If you own a policy, you could be the insured, but not the beneficiary.
In bankruptcy, life insurance can be relevant in two main ways: if your policy has cash value or if you’re a beneficiary and the insured person passes away around the time you file for bankruptcy.
This article breaks down everything you need to know about life insurance and bankruptcy. Life insurance is often recommended for financial planning, but what happens to it when you’re facing bankruptcy? Will it be affected? Let’s find out.
Can Bankruptcy impact my life insurance policy?
Filing for bankruptcy usually won’t affect your life insurance policy. Most life insurance policies are protected, meaning creditors can’t take them during bankruptcy. So, even if you file for bankruptcy, your policy remains yours and can’t be used to pay off debts.
However, you need to know that there are certain exceptions. If you have a whole life insurance policy with cash value, it’s considered an investment, not just insurance. In some cases, creditors might be able to access that cash value. Keep in mind that asset protection laws vary by state, so the rules might differ depending on where you live.
Understanding How Bankruptcy Affects Term vs. Permanent Life Insurance
Term life and permanent life insurance are two types of life insurance policies. Let’s take a look at how bankruptcy affects these two main life insurance policies.
Term life insurance
Term life insurance covers you for a set period, like 10 to 30 years, and pays a benefit if you pass away during that time. If you file for bankruptcy, your term life insurance policy is generally safe from creditors. It’s considered an exempt asset, so it usually won’t be used to pay off your debts. However, it’s important to check with a bankruptcy attorney to make sure your specific situation is covered by these exemptions.
Permanent life insurance
Meanwhile, permanent life insurance lasts for your entire life and builds cash value over time, which you can borrow against or withdraw. Bankruptcy can affect permanent life insurance in more complex ways:
- Cash Value: The cash value of your policy might be accessible to creditors, but state laws may protect some or all of it. Consulting a bankruptcy attorney will help you understand what’s protected.
- Surrendering the Policy: You might have to choose to surrender your policy to use its cash value to pay off debts. However, this could leave your loved ones without coverage, so it’s a decision that should be carefully weighed.
- Policy Loans: Loans you’ve taken out against your policy might be treated as secured debts, which could have different effects in bankruptcy. A bankruptcy attorney can help you navigate these details.
Will Bankruptcy Affect My Life Insurance Premiums?
Just so you know, the timing of when you buy your life insurance policy can matter. If you recently bought a policy and then filed for bankruptcy, the court might take a closer look. They could be very suspicious and view it as an attempt to shield assets from creditors, which could lead to an investigation into your policy.
Also, bankruptcy can affect your insurance premiums. Since your credit score typically drops after filing for bankruptcy, you might face higher premiums when getting new insurance. However, if you already have a policy before filing, your rates are unlikely to change.
Can I Still Get Life Insurance After Bankruptcy?
Yes, you can still get life insurance after bankruptcy, though it may be a bit more challenging. Bankruptcy doesn’t prevent you from applying for coverage, but it can affect the options available to you. Since life insurance companies look at financial stability when deciding premiums, a bankruptcy may make some insurers view you as a higher risk, potentially leading to higher rates.
However, it’s still possible to get affordable life insurance, especially if you’ve worked on rebuilding your credit and have a stable income. Some insurers specialize in working with people who have gone through financial hardships, so it’s worth shopping around to find the best fit.
Conclusion
In summary, life insurance is generally a protected asset during bankruptcy, meaning your policy will usually stay in place. However, there are some exceptions, especially if your policy has cash value or was purchased just before filing.
Additionally, bankruptcy can lower your credit score, which might lead to higher premiums for new policies. If you’re unsure how bankruptcy might affect your life insurance, it’s a good idea to talk to a financial advisor or insurance agent for guidance.
