In the height of the economic recession, 1.5 million Americans filed for bankruptcy in 2010.  Thankfully bankruptcy filings have been on the decline since then.  Fewer than 800,000 people filed in 2016.  While that number still seems high, it’s the sixth consecutive year that bankruptcy filings have fallen.

Filing for bankruptcy is by no means a rare occurrence so it’s a valid question to ask “Can I be approved for life insurance even if I have filed for bankruptcy?”  There are three different types of bankruptcy that life insurance underwriters typically encounter.  Individuals usually file Chapter 7 or Chapter 13, whereas businesses typically file Chapter 7 or Chapter 11.

Chapter 7 Bankruptcy

Chapter 7 is the most common type of bankruptcy and often referred to as a liquidation bankruptcy.  This is when a trustee sells off assets owned by the person in debt (debtor) and uses the proceeds generated to repay the debts.

Chapter 11 Bankruptcy

Chapter 11 is the most complex type of bankruptcy and known as the reorganization chapter of the bankruptcy code.  This is when a debtor, generally a business, is allowed to continue to function and maintain ownership of assets while paying off debt.  The debtor reorganizes financial obligations to pay down debt, typically through the sale of certain assets, and refinance existing debts.

Chapter 13 Bankruptcy

Chapter 13 is like Chapter 11 but for individuals instead of businesses.  The debtor maintains ownership of assets and works out a repayment plan.

Life Insurance Underwriting and Bankruptcy

There are two main concerns when underwriting a history of bankruptcy.

  • The more recent the bankruptcy and the more fragile the financial situation there could be greater pressure to obtain life insurance with the belief that premature death would relieve the financial pressure on the family or business.
  • The instability of the financial situation can also hinder the insured individual’s ability to make future premium payments causing the policy to lapse and coverage to be terminated.

If you are currently in the process of bankruptcy, there is a chance you will be denied coverage.  However, each case is unique and is underwritten on a case-by-case basis.  To be considered for coverage, certain factors should be in play:

  • If you filed for Chapter 13 bankruptcy, it’s ideal if you apply for life insurance at least six months from when you filed the bankruptcy petition.
  • You have current earned income.
  • You have no prior history of bankruptcy.
  • Your petition has already been accepted by the court.
  • You are not currently in treatment for any psychological, mood, or anxiety disorders, nor do you have history of such.
  • You have a stable family relationship or environment.
  • There is no current or history of alcohol or drug treatment.

The best case scenario would be that your bankruptcy has already been discharged (a.k.a. debt repayment requirements have been met.)  However, this is not a requirement to be considered for coverage.  For applicants that do not meet the above criteria, typically life insurance companies will want to wait until two years after the bankruptcy has been discharged to offer coverage.

The more time that has passed since date of bankruptcy discharge, the less concerning it is in the eyes of an underwriter.  It still will be considered in the applicant’s overall financial picture, but it will be much less significant.  When applying for life insurance with a history of bankruptcy, be prepared that you will likely be required to provide more financial documents than typical, such as proof of earned income and a copy of the bankruptcy petition.

Not all life insurance carriers underwrite in the same way, so working with an independent agency like Quotacy is extremely beneficial.  We have contracts with multiple carriers and when you apply, if you happen to choose a carrier that we know isn’t lenient when it comes to bankruptcy, we’ll give you other carrier options.  You are by no means required to switch carriers, but the more options you have, the better your chances for getting approved.  Start exploring by getting a term life insurance quote today.


Photo credit to: Prasanta Sahoo


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