Buying Life Insurance After Bankruptcy


Having a bankruptcy on your credit report, especially recent one, can affect much of what you will do in life. It can certainly have an impact when you apply for a loan, whether it’s a mortgage, a car loan, or a credit card. But it can also have an effect on an application for a job or an apartment. And as if life after bankruptcy isn’t difficult enough, it is possible that the bankruptcy will even have an effect on an application for life insurance.

That’s not a comforting consideration, but one that cannot be ignored. One of the reasons why this is such a relevant topic is that the circumstances that lead to bankruptcy often cause a person to cancel certain services, including life insurance. Since money is needed to deal with creditors, all services that are considered nonessential may be jettisoned.

But the problem can occur after the bankruptcy, when your need for life insurance reasserts itself. And at that point, you’ll have to make application with the bankruptcy on your credit report.

How does that look to an insurance company?

How Do Life Insurance Companies View Bankruptcy

In underwriting an application for life insurance, the insurance company considers various risk factors. Your health condition is an obvious one, but so is your age. In addition, they also look at non-health-related risks, such as your occupation and even your hobbies.

But credit can represent a risk as well. In addition to the fact that poor credit can be an indication of other risk factors, it also represents a financial risk. The insurance company has to consider that bad credit – which a bankruptcy represents – could cast doubt on your ability to pay the premiums.

Why this matters has to do with the cost of providing a life insurance policy. For the insurance company, the highest cost of providing a policy happens in the first few years that the policy is in force. This is the time during which the insurance company must use the premiums to recover the costs associated with underwriting the application. This includes obtaining medical reports, paying employees to underwrite the application, and paying for any third-party fees in the process.

Should you lapse the policy within the first few years that it is in force, the insurance company can actually lose money on the transaction. That raises their cost of doing business, which makes them consider an applicant with bankruptcy to be a higher risk.

Term Insurance vs. Whole Life in Bankruptcy Proceedings

What happens to your life insurance policy when you’re going through bankruptcy? That depends upon the type of policy that you have.

If it’s a term life insurance policy, it will be completely unaffected by the bankruptcy. Since a term life insurance policy has no cash value or investment value, there are no assets to be seized by the bankruptcy court.

The situation is very different with whole life insurance policies, and other investment type insurance policies. While some of the cash value in the policy may be protected by bankruptcy laws, any amounts that exceed the protection limits can be seized by the court. That money will then be distributed to the various creditors on a prorated basis. Exactly how much you’re allowed to keep, and how much the court can seize, depends upon the bankruptcy laws in your state.

How Long Might Bankruptcy Affect a Life Insurance Application

One of the problems with bankruptcy is the length of time that it stays on your credit report. A chapter 7 bankruptcy – which is a complete bankruptcy – can remain on your credit report for up to 10 years. That means that will continue to have some effect on your life, and on an application for life insurance, for as long as it appears on your credit report.

Time however is your friend in this regard. If you filed for bankruptcy only recently, the impact will be greater. But if several years have passed, and you have reestablished credit in the interim, it will be less of a factor.

In either case, you may expect to see some increase in the premium rate based on how recent your bankruptcy took place. The insurance company will use the increased premium as insurance against an early term lapse in a policy.

Why You Can’t Wait Until the Bankruptcy Falls Off Your Credit Report

Considering that bankruptcy does represent a very real risk when applying for life insurance, you might be tempted to wait until it falls off your credit report. But that’s a tall order, considering that it could take up to 10 years.

Going without life insurance for 10 years would not be a wise decision. That’s a long time to go without coverage, especially if you have family members who are dependent on your income. The lack of any type of life insurance coverage at all could leave them completely exposed financially in the event of your death.

A better option might be to take the policy with a higher premium, and then switch to a new policy after the bankruptcy falls off your credit report. At that point, if a lower premium is available, you can take advantage of it.

However, if your health has deteriorated since taking the policy, or your age has increased significantly, causing a new premium to be higher, you can always stay with the first policy you purchased.

It may even be possible for you to ask your life insurance provider to review your policy once the bankruptcy drops off of your credit report. As long as there are no other factors that increase the risk associated with your policy, they may reduce your premium.

Work With the Right Insurance Company

Just as the case with health-related risks, you should always try to work with the insurance companies that have the most favorable view of bankruptcy. And they are out there. While some companies will charge very high premiums for people with a bankruptcy in their past, other companies may increase the premium only slightly, and maybe not at all if it’s a few years old.

Finding those companies out of the dozens that are available is no small task. In fact, the only way to know for sure who those companies are is through experience. That’s where working with the right insurance agent can make all of the difference.

We work with dozens of insurance companies, and with plenty of folks just like you. We are keenly aware that people have all kinds of circumstances, whether related to health, occupation, or finances. We know who the best insurance companies are for you to apply to, and we’d like to help you. Give us a call and let us work with you. You will not pay anything extra for our services. That means that you have everything to gain, and nothing to lose.