Some people hesitate to file for bankruptcy due to fears that it will make it harder to take out loans or apply for new credit cards. You may also worry that bankruptcy will negatively impact your life insurance or your ability to obtain it in the future.
In reality, bankruptcy does not necessarily make it difficult to acquire life insurance, plus it can help preserve your current coverage if creditors are coming after you for unpaid debts.
Bankruptcy halts creditor claims
One of the primary concerns surrounding bankruptcy is the potential loss of assets to creditors. However, creditors are unable to seize the proceeds of your life insurance policy if it is payable directly to your designated beneficiaries. This ensures that your loved ones receive financial support in the event of your death.
However, this protection applies specifically to term life insurance policies, which do not accumulate cash value. If you have a permanent life insurance policy with a cash value component, the cash value portion may be considered an asset and could be subject to creditor claims. However, the death benefit itself remains protected and will pay out to your beneficiaries.
Impact of bankruptcy on life insurance rates
When it comes to obtaining new life insurance coverage or renewing an existing policy after bankruptcy, insurance companies may view you as a higher risk. They might assume your financial difficulties will impair your efforts to consistently maintain premium payments. As a result, you may face higher premiums or stricter underwriting requirements.
Factors that help obtain better premiums
The impact on your rates will depend on the type of bankruptcy you filed and the elapsed time since its discharge. If you filed for Chapter 7 bankruptcy, most insurers will require you to wait one to two years after the discharge before considering you for a new policy. On the other hand, insurers often look at Chapter 13 more favorably since it involves a repayment plan, so you may be eligible for coverage sooner.
To increase your chances of securing affordable rates, you may demonstrate financial stability by providing proof of steady income and an improved credit history. The further you are from your bankruptcy discharge date, the less likely it is to significantly impact your life insurance rates.
Navigating the complexities of bankruptcy can be challenging, but understanding its impact on your life insurance may alleviate some of the stress.
