Bankruptcy and Life Insurance: What You Need to Know

Filing for bankruptcy is by no means a rare occurrence today, so if you have questions about bankruptcy and life insurance, you aren’t alone. 

To explore how bankruptcy impacts life insurance, we’ll go over the three different types of bankruptcy that life insurance underwriters typically encounter today. Plus, we’ll show you what happens in each case.

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Before we dive in, it’s important to understand that individuals usually file Chapter 7 or Chapter 13, whereas businesses typically file Chapter 7 or Chapter 11.

Let’s start out today with Chapter 7 Bankruptcy as it’s what most people deal with.

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 that factor into if you can get life insurance when underwriting a history of bankruptcy.

With a more recent bankruptcy and more fragile 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.

How to Get Life Insurance When You’ve Filed for Bankruptcy

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.

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To get life insurance coverage or to be considered for coverage in the near future, certain factors must 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, life insurance companies will want to wait typically until two years after the bankruptcy has been discharged to offer coverage.

Life Insurance After a Discharged Bankruptcy

The more time that has passed since date of your bankruptcy discharge, the less concerning it is in the eyes of an underwriter.  It will still be considered in the applicant’s overall financial picture, but it will be much less significant.

When trying to get life insurance with a history of bankruptcy, be aware that you will likely be required to provide more financial documents than is 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 life insurance broker like Quotacy is extremely beneficial. We have contracts with multiple carriers. 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 options.

You are by no means required to switch carriers, but the more options you have, the better your chances are of getting life insurance.