We get a range of questions in our practice and clients sometimes wonder how bankruptcy affects life insurance policies. In general, filing for bankruptcy will not cause your existing life insurance policies to be canceled. However, it may impact how much you pay in premiums and how quickly your policy pays out benefits. Additionally, some forms of coverage may become more expensive and difficult to obtain after a bankruptcy.
In this article, we’ll explain how bankruptcy affects life insurance policies and recommend talking with a qualified bankruptcy lawyer if you are considering filing for bankruptcy.
What Happens to Existing Policies
Your life insurance policy will most likely be exempted when you file for bankruptcy protection. Even so, you will be required to disclose it.
Generally, any existing policies remain valid but could be subject to higher premiums or reduced coverage limits due to your credit rating being affected by the bankruptcy. The amount of premium increase or decrease varies depending on the type of policy and insurer but can range from small percentage increases to substantial hikes in costs.
However, there is a difference in how term and whole life insurance policies are handled. Term life insurance policies do not have a monetary value. They must be declared as assets in the filings but cannot be liquidated to pay off your debts. Generally, they are safe from liquidation.
Whole life insurance is also protected but under specific conditions. The beneficiaries of the policy must be immediate family only (spouse and children). As long as your spouse and children are the only ones that benefit from it, your whole life insurance policy is off limits to bankruptcy liquidation. It is best to talk with us about your particular policy and the effect of bankruptcy.
After a successful discharge of debts, finding new coverage could become more difficult and expensive due to your low credit score and the fact you filed for personal bankruptcy. Insurers typically use credit scores as part of their risk assessment process. Individuals with lower scores may be charged higher premiums than those with better credit ratings based on perceived risk level.
Talk With Minnesota Bankruptcy Lawyer – Kain+Henehan
If you are concerned about things like how bankruptcy affects life insurance policies and other questions about personal bankruptcy, you should consult a qualified bankruptcy lawyer for legal advice. At Kain + Henehan, we understand that thinking about bankruptcy can be stressful, so we believe talking with us should not be. As experienced Minnesota bankruptcy lawyers, we have consulted with and helped many clients. With offices in St. Cloud and in Mendota Heights (near the Twin Cities), we are available in person, by phone, and virtually by video (like Zoom or FaceTime).