Can I Get Life Insurance After Filing Bankruptcy?
It may seem strange that a prior or in-progress bankruptcy could impact your ability to get life insurance, but unfortunately, it can. Bankruptcy proceedings can make it difficult to get a life insurance policy, especially if you are currently going through the bankruptcy process or you have just made your way through it. But why does your personal financial situation make it more difficult to get a life insurance policy? Insurance providers consider many factors when determining if they will give you a policy and the level of risk you present to them greatly impacts the kind of coverage you receive or how much you might pay for it. Unfortunately, bankruptcy can be a deciding factor in terms of risk.
While filing bankruptcy can make finding and getting a life insurance policy a more tricky process, having your debts cleared doesn’t mean that you are forever ineligible for a life insurance policy — it just takes time and understanding of how the bankruptcy process plays into your ability to purchase a life insurance policy.
Why Life Insurance Companies Are Weary of Bankruptcy
Life insurance companies rely on insurance underwriters — professional financial analysts whose job is to evaluate how risky it is for an insurance company to give you a policy — to determine if you qualify for life insurance. These underwriters work through each application to decide if extending you a life insurance policy would cost the company, and they do so through examining your health, financial situation, and other factors. This is why many people with pre-existing health conditions such as diabetes or cancer have a more difficult time finding a budget-friendly insurance policy for which they qualify.
Just like pre-existing conditions, medical underwriters will evaluate your personal financial situation to also determine risk. This is partially because a life insurance company wants to know that they will receive the monthly premium you pay for coverage. Someone going through bankruptcy or who has a recent discharge may have difficulty getting back on track financially, making you a less desirable life insurance candidate.
In addition, bankruptcy is a financially stressful and difficult time that can impact your mental health and big life decisions. Not every person who receives a bankruptcy discharge has all of their debts cleared, and many are still responsible for some kinds of repayment for the debt they own. In this situation, life insurance companies are wary of potential life insurance fraud, or contributing to a situation where someone considers life insurance one way of fully clearing debt for their family. This is especially the case immediately after a bankruptcy discharge when you haven’t paid much in premiums, and a life insurance policy payout upon death would be a financial loss for the company.
How Bankruptcy Can Impact Your Life Insurance Application
Listing a recent or ongoing bankruptcy on a life insurance application can impede your ability to get a policy. In most cases, it can lead to several outcomes:
Higher monthly premiums: The insurance provider may accept your application and grant you a policy, but because you are a risky client, they make try to protect themselves with higher monthly premiums. Generally, the longer you wait after bankruptcy to apply for a life insurance policy, the less your financial status will impact your application. This means that you may pay a higher premium six months after a bankruptcy discharge than you would one or two years later.
Waiting periods: An insurance company may still choose to give you a life insurance plan, but to add extra protection for themselves, they may institute a waiting period. Waiting periods prevent your beneficiaries from collecting a life insurance payout before a certain amount of time has passed — and in almost all cases, the owner of the policy must have been living through the waiting period. Common waiting periods range from two to three years, and if you die during that time, there is no payout. Following the waiting period, your beneficiaries have access to your life insurance funds if the situation were to arise.
Rejection: Unfortunately, a recent bankruptcy filing can lead to rejection of your life insurance application. An insurance company may deem you too risky to cover and choose to deny you a policy. In some cases, the insurance provider may recommend you try again after a certain period of time (ranging between months and years depending on how long it has been since your bankruptcy case). In almost all situations involving bankruptcy and life insurance plans, time is a key factor to determining whether or not you can get coverage. The longer the time since your bankruptcy discharge, the better.
What Happens If I Am Rejected?
It can sting to know that your life insurance application was rejected because of a bankruptcy filing, but do not be discouraged. Not every life insurance provider has the same underwriting rules, meaning some companies may still choose to give you coverage even if you have been rejected by another insurer.
Seeking out companies that are willing to work with bankruptcy can help you to find the best plan that fits your budget. Life insurance applications are generally free, so do not be afraid to narrow down your options and try again. But in all applications, it’s important to be honest about your medical and financial background — it can be tempting to fib or minimize details to get coverage, especially after rejections, but in the long run, insurance companies can still deny your application if they determine you have lied. Or, if the policy is awarded and the provider later learns you lied, you could face higher premiums.
Whether you have been rejected or are starting the search for a life insurance policy after bankruptcy, remember that there are different kinds of plans. Whole life plans often cost more upfront and may have more loopholes to jump through, making term life plans a strong option for someone who has recently filed bankruptcy. Since term life plans are only around for a span of several years, insurers may be more willing to extend a policy to you regardless of your financial situation. In any case, consider speaking with a PolicyZip life insurance specialist to see what your life insurance policy options are after bankruptcy.