Bankruptcy and Buying Life Insurance
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“What does bankruptcy have to do with buying a life insurance policy?” I often hear this question coming from potential clients over the phone when I ask them if they have ever filed for bankruptcy. “I thought life insurance was about how healthy I am?” is the usual response. It is, I answer, however, the underwriters also care about the total risk you pose to the insurance company. In the eyes of the insurance company, risk can be classified as your overall health, family history, hobbies, and financial endeavors, among other things.
Can I Buy Life Insurance After Bankruptcy?
The short answer is yes. However, each insurance company will view your bankruptcy a little differently, and the type of bankruptcy you file and how much time has passed since you filed will also makes a difference, as explained below.
With most insurance companies, a bankruptcy must be discharged before they will even consider you for coverage. Some companies will add a waiting period of 1-2 years after the discharge and will ask some proof of employment history and income, and some will even need to make sure that there are no lifestyle or mental concerns.
Also, note that if there are multiple bankruptcies on your record, you are entering the territory for “consideration on a case by case basis.” This isn’t the greatest position to be in because you will have to prove even harder to the insurance company why you are a good candidate for a policy. You have to present more proof in forms of financial justification, a cover letter, and additional information at the underwriter’s discretion.
Chapter 11 & 13
With chapter 11 & 13, some insurance companies will consider you for a policy immediately, provided that a payment plan was established, you’re making payments regularly, and you are not subject to any court-imposed restrictions. Further, they will need to see a stable employment history and financial justification–the policy amount has to be in the right proportion to your income.
How Do Life Insurance Companies View Bankruptcy
- When underwriting an individual for a life insurance policy, the companies are looking at a few factors that represent your total risk. An obvious one is your health, but there are others, such as your driving record, profession, hobbies, and even your financial habits. Having a bankruptcy on your record proves to them that you may not be able to make the ongoing payment for the next 20 or 30 years. You may ask, “why do they care what if I only pay for a year? They got a year full of payments, so who cares?” We call this the cost of doing business. After issuing a policy, it actually takes the insurance company a few years to start making money and recovering some of the upfront costs associated with the process of underwriting and delivering a policy. For instance, paying the nurse who comes to do your medical test, obtaining medical records from your doctor’s office, and paying for the MIB (Medical Information Bureau), DMV reports, and office supplies are all upfront costs that are paid before the policy is even in force. After the policy is active and you start paying your premiums, the insurance company has to start paying the broker’s commission, so they aren’t out of the hole yet.
- A recent Harvard study showed that 62 percent of personal bankruptcies in the United States are related to medical expenses. This is another reason for the life insurance underwriter to see an extra risk, since you may not even be healthy to start with.
Examples of How Life Insurance Companies View Bankruptcy
- AIG – No coverage for two years after discharge.
- American National – Must be discharged, multiple bankruptcies is a 2-year postponement.
- Assurity – No coverage until discharged.
- Banner – Chapter 7 must be discharged, chapter 13 can be considered on a case-by-case basis.
- Mutual of Omaha – Must be discharged, chapter 13 & 11 will have individual consideration six months after the original petition date.
- Prudential – Must be discharged, chapter 11 & 13 only after payment has been established and most of the debt has been repaid.
- Sagicor – Must be discharged.
What If I Already Have a Policy?
If you currently have a policy in place, in most cases, if your current policy is a term policy, the court will allow you to keep the policy. This is because term life generally has no cash value and it’s intended for the benefits of others (such as family members or loved ones who may need it should you die prematurely) and not yourself.
It is different, however, if you have a whole life policy, which carries a savings or cash benefit. You may need to surrender part of it to the court. Side note: it depends on what state you live in and the laws and regulations in that specific state.
Why You Should Use a Broker
Life insurance is never about who has the lowest displayed rates, but is more about which company will actually approve your policy at the lowest rate, with the benefits you need. This is the main reason why it is imperative that you use a broker who has extensive knowledge in dealing with your specific situation while applying for life insurance.
Whether you are applying with a pre-existing condition, a DUI on your record, even a bankruptcy, it’s in your best interest to have someone on your side that also wants your policy to be approved (since that’s how we get paid) at the best possible rate. You can run the quotes yourself on this page.