What happens to my life insurance if I declare bankruptcy?

To put it mildly, bankruptcy is a stressful time. Among the many worries and questions you might have, you might wonder what happens to your life insurance policy, if you have one, after you’ve declared bankruptcy.

The answer depends on what type of life insurance policy you have, and what type of bankruptcy you’ve declared. Keep reading to learn more about what happens to life insurance during bankruptcy.

What is bankruptcy?

Bankruptcy is a legal process that allows individuals or businesses to declare that they cannot repay their debts. It’s a formal declaration that you are unable to meet your financial obligations and that your assets are insufficient to cover your debts.

Typically, you file for bankruptcy in court. Once the court accepts the bankruptcy petition, an automatic stay is put in place that prevents creditors from pursuing collection actions against you. This means that once you begin the bankruptcy process, you won’t need to worry about additional legal notices arriving at your door. Bankruptcy auditors will communicate with your creditors and let them know there is a plan in place for repayment.

The goal of bankruptcy is to provide a fresh start for individuals or businesses burdened with debt they cannot pay. There are several types of bankruptcy, but the most common are Chapter 7 and Chapter 13.

• Chapter 7 bankruptcy is also known as liquidation bankruptcy. It involves selling assets to pay off creditors, and any remaining debts are discharged, or eliminated. In exchange for having your debts discharged, you may be required to surrender certain assets to be sold — those funds will then help repay creditors. Depending on the type of life insurance policy you have, you might be forced to surrender a portion of your life insurance policy’s value to creditors as a term for full or partial debt forgiveness.
• Chapter 13 bankruptcy is also known as reorganization bankruptcy. It involves creating a payment plan that lets you repay some or all of your debts over three to five years. The payment plan is based on your income and expenses, and any remaining debts are discharged at the end of the payment plan.

Bankruptcy has serious consequences, such as damaging your credit score, and you may lose some of your assets. However, for some people, bankruptcy may be the best option for getting out of debt and starting fresh.

Know that if you are forced to file bankruptcy, there will be severe limitations on your future ability to use credit and borrow money. Even if you are in debt, it’s a good idea to consult with a bankruptcy attorney before deciding to file.

Is my life insurance policy subject to seizure in bankruptcy?

In short, yes… depending on what type of policy you have.

If you have a term life insurance policy, it typically does not accumulate cash value, meaning it cannot be used to repay your creditors. The upshot is your policy will remain in place, provided you can still make your premium payments. (See below.)

If you have a whole life insurance policy or another type of permanent life insurance policy, it likely does accumulate cash value. This cash value can be used to repay your creditors, though there is a federal exemption of $14,875 — meaning any value over that amount is subject to seizure. (Some states provide additional exemptions. Your bankruptcy lawyer should be aware of these.)

Depending on your financial situation, including whether you can pay future premiums, your policy would remain in place.

What happens to my life insurance policy if I can still pay my premiums?

If your policy is left in place under the terms of your bankruptcy agreement, and you can still afford to pay the premiums on that policy, your policy will remain in place. Your loved ones also will still be entitled to receive the death benefit in the event of your death.

What happens if I can’t pay my premiums?

This is obviously the bigger issue.

If you have a term life insurance policy (such as Haven Term from Haven Life), and you are unable to pay your monthly life insurance premiums, your life insurance policy issuer is likely to terminate the policy.

You will not be refunded the premium payments you have already made, and your beneficiaries will not receive a death benefit in the event of your death. Essentially, it will be as if you have canceled your policy. (At Haven Life, there is a 30-day grace period, and your policy will end if you do not make a payment after that time expires.)

If you have a whole life insurance policy, your policy typically has a cash value that grows over time. If you are unable to make payments, it’s possible the accumulated cash value can cover your premiums for a time. If not, your policy will end, and your beneficiaries will not receive a death benefit in the event of your death. Again, it’s as if you have canceled your policy.

Moreover, the cash value from your whole life insurance policy might be used to help pay off your debts as part of the bankruptcy process. If this happens, and you are unable to make future payments, your policy will lapse.

Can I still get life insurance after bankruptcy?

In the event that you need to replace a life insurance policy lost during the bankruptcy period, you can apply for a new policy during or after bankruptcy, but it will be more difficult than it was before. Not only are you older (which will translate to a higher premium), but insurers examine your credit score, and may offer you higher premiums as a result.

You might also need to wait — if you filed for Chapter 7, for example, you might need to wait a year or two before an insurer will offer you a policy, due to the risk involved. If you filed for Chapter 13, you’ll likely face fewer restrictions, but you will still be offered a higher premium for the same amount of coverage.

Suffice it to say that bankruptcy is an incredibly difficult time. If you have questions about an existing Haven Term policy, you can contact us and we would be happy to help. If you’re interested in applying for a new policy, start by getting a free online quote today.