Life insurance is well-known for its financial safety tool which offers protection and peace of mind. However, despite its benefits, you might experience some financial challenges which could lead to bankruptcy. In such a case, you might be curious to know what happens to your life insurance if you declare bankruptcy.
Depending on the kind of life insurance and bankruptcy you have, will determine what happens if you declare it. In this article, we provide the main key points based on the potential effect bankruptcy could have on life insurance and how to overcome such an event.
What Is Bankruptcy
Bankruptcy is a legal procedure that offers people and companies peace of mind from debts that they cannot pay. This system is held by the court whereby the debtor will either receive a more manageable reimbursement plan or will be discharged from debts. In addition, there are various kinds of bankruptcy which are called chapters. Most people regularly file Chapter 7 or 13, while companies file Chapter 7 or 11.
Chapter 7 Bankruptcy
Occasionally, this is known as liquidation bankruptcy which is the most common type of bankruptcy. In this situation, the debtor’s properties are sold off, and the proceeds are utilized to reimburse creditors.
Chapter 11 Bankruptcy
This is known as the hardest type of bankruptcy which is called the reorganization chapter. Additionally, it’s utilized by companies and enables them to proceed with tasks while they rebuild their debts handled by the court.
Chapter 13 Bankruptcy
This kind of bankruptcy is the same as Chapter 11 but is made for people instead of companies. In this case, the debtor can have their asset while settling debts over a duration like three to five years after the court’s approval of the repayment plan.
It’s essential to remember that filing for bankruptcy has significant disadvantages and offers financial relief. Also, it will reduce your credit score and make it difficult for you to obtain loans in the future. Bankruptcy can also have some impact on your financial aspects like life insurance.
Types of Life Insurance
Before learning more about how bankruptcy can affect your life insurance, it’s important to understand the different types of policies. Generally, there are two major types of life insurance such as term life insurance and permanent life insurance.
Term life insurance
This coverage offers a specific duration called term which lasts within 10 to 40 years. A payout known as death benefits will be offered to the designated beneficiaries in your policy from your insurance provider if the term is active when you die. Your coverage will also expire once the term ends.
However, you can decide to renew or switch the policy to a permanent type before the expiration. Furthermore, term life insurance is cheaper than permanent life coverage since it offers easy, temporary coverage.
Permanent life insurance
Permanent life insurance provides coverage for as long as you live and continue to reimburse premiums. In addition, this coverage offers a cash value component that expands over time. This cash value can be withdrawn and borrowed. Also, some kinds of permanent coverage offer dividend payments to policyholders. With these accessible extra features, your permanent life insurance premiums are greatly higher than those for term life insurance.
How Does Bankruptcy Affect Your Life Insurance
Due to the insurance provider’s view of your increased risk of loss, a bankruptcy history may result in higher life insurance premiums. Showing financial stability is important if you want to increase your chances of getting coverage at a reasonable cost, particularly in the first two years after filing for bankruptcy. This could entail maintaining steady assets like a house or car, which would support the life insurance you’re requesting.
Working with an experienced broker can be especially beneficial, as providers differ in how they assess bankruptcy histories. Furthermore, brokers can search and compare rates from various insurance companies to find the best deals for your situation. Generally, your rates won’t be affected by your bankruptcy as much the longer it has been since it was discharged.
Am I Qualified for Life Insurance If I File for Bankruptcy
Most insurance providers view bankruptcy as a risk factor because of the chance that you will be unable to pay your premiums on time in the future. Purchasing insurance is hard for those with Chapter 7 bankruptcy and bankruptcy cases that haven’t been settled for more than two years. Moreover, if you have filed for bankruptcy under Chapter 13, you might have a few choices.
It’s crucial to compare the policies offered by several insurance companies at once because they all handle bankruptcy differently. When you shop around, you’ll not only find competitive rates but also a clearer understanding of each insurance company’s requirements regarding financial stability.
Can I Still Get Life Insurance after Bankruptcy
You can apply for a new life insurance policy during or after bankruptcy to declare one you lost during the bankruptcy period which happens. However, the process will be more challenging than it was previously. In addition to your advanced age, which will result in a higher premium, insurers may also raise your offer of insurance based on their review of your credit history.
Additionally, you might have to wait a year or two after filing for Chapter 7 before an insurer will offer you a policy because of the risk involved. Furthermore, you will probably have fewer restrictions if you file under Chapter 13. However, you will still pay more for the same amount of coverage.