Selling Life Insurance After Bankruptcy: What You Need To Know

If you're considering selling life insurance, it's important to understand how bankruptcy can impact your career. While a bankruptcy filing doesn't automatically disqualify you from the profession, it's crucial to be aware of potential challenges. You'll generally need to wait until your bankruptcy is officially discharged before pursuing most opportunities in the life insurance industry. This waiting period can vary, and some companies may require up to two years before considering your application. Additionally, your financial stability and credit history will be scrutinized, and you may face higher insurance premiums due to being considered a higher-risk customer.

What are the different types of bankruptcy?

Bankruptcy is a legal proceeding that offers a fresh start to individuals or businesses unable to repay outstanding debts. It is handled in federal courts and is carried out according to the rules outlined in the U.S. Bankruptcy Code. While bankruptcy can provide financial relief, it also has several downsides, including a negative impact on credit scores and increased difficulty in obtaining loans or credit in the future.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," is the most common form. In this type, the debtor's assets are sold off, and the proceeds are used to repay creditors. Individuals typically file for Chapter 7 bankruptcy to dispose of unsecured debts such as credit card balances and medical bills. If the debtor has nonexempt assets, such as family heirlooms, investments, or a second home, they must be liquidated to repay unsecured debts. However, certain exempt assets, such as household goods, clothing, tools for trades, and a personal vehicle up to a certain value, may be retained.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy is known as the "reorganization" chapter and is the most complex type. It is commonly used by businesses, allowing them to continue operations while restructuring their debts under court supervision. Businesses filing for Chapter 11 bankruptcy can create plans to improve profitability, cut costs, and find new revenue streams. While rare, individuals can also file for Chapter 11 bankruptcy in certain circumstances.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is similar to Chapter 11 but is designed for individuals rather than businesses. In this type, the debtor can retain their property while following a court-approved repayment plan to repay debts over a period, typically three to five years. This option is available to individuals with consistent income who do not qualify for Chapter 7 bankruptcy due to their income level.

Chapter 9 Bankruptcy

Chapter 9 bankruptcy is specifically for financially distressed municipalities, including cities, towns, villages, counties, and school districts. It allows them to develop a plan to repay their debts over time without having to liquidate assets.

Chapter 12 Bankruptcy

Chapter 12 bankruptcy provides debt relief to family farmers and fishermen, allowing them to maintain their businesses while working on a debt repayment plan.

Chapter 15 Bankruptcy

Chapter 15 bankruptcy was added to the law in 2005 to handle cross-border cases involving debtors, assets, creditors, and other parties in multiple countries. This type of petition is usually filed in the debtor's home country.

Can I get life insurance after bankruptcy?

Bankruptcy can be a stressful and challenging time, and it's understandable to want to secure life insurance to protect your loved ones financially. The good news is that having a bankruptcy on your financial record doesn't automatically disqualify you from getting life insurance. However, there are several factors and conditions that come into play when applying for life insurance after bankruptcy. Here's what you need to know:

Types of Bankruptcy

Firstly, it's important to understand the different types of bankruptcy. Individuals typically file for Chapter 7 or Chapter 13 bankruptcy. Chapter 7 is often called "liquidation bankruptcy" and involves selling off assets to repay creditors. Any remaining debts are then discharged or eliminated. On the other hand, Chapter 13 is known as "reorganization bankruptcy," where individuals create a repayment plan to pay back their debts over three to five years.

Waiting Period

When it comes to getting life insurance after bankruptcy, you usually need to wait until your bankruptcy is officially discharged before applying for most policies. The waiting period can vary depending on the type of bankruptcy. For Chapter 7, you may need to wait at least a year or two after the discharge date before insurers will consider offering you a policy. For Chapter 13, there may be fewer restrictions, but you will likely be offered higher premiums due to the risk involved.

Impact on Premiums

A bankruptcy history can result in increased life insurance premiums. Insurers may view you as a higher risk, and the closer you are to your bankruptcy discharge date, the more impact it can have on your rates. However, as more time passes since your bankruptcy, its effect on your premium rates will generally decrease.

Application Evaluation

When evaluating your application for life insurance after bankruptcy, insurers will consider various factors. They will assess your financial stability, including your income, assets, and ability to maintain regular premium payments. They will also look at your overall health and age, which are standard considerations for any life insurance application. Additionally, they may review your bankruptcy repayment details and whether you've filed for bankruptcy multiple times. Maintaining a stable family environment and a clean bill of health, free from psychological or substance abuse issues, can also help your application.

Working with a Broker

Given that insurance companies can vary in their evaluation of bankruptcy histories, working with an experienced broker can be beneficial. A broker can shop around and compare policies from multiple insurers to find the best rates and options suited to your specific circumstances.

In summary, while bankruptcy may make it more challenging to obtain life insurance, it is still possible to secure coverage. The key factors are demonstrating financial stability, allowing time to pass since your bankruptcy discharge, and working with a knowledgeable broker who can guide you through the process and help you find the right insurer.

How does bankruptcy affect my life insurance rates?

Bankruptcy can affect your life insurance rates in several ways. Firstly, it's important to note that a personal bankruptcy does not permanently prevent you from obtaining life insurance. However, it may result in higher life insurance premiums as insurance providers will consider you a riskier client. The impact of bankruptcy on your rates tends to diminish over time, so the longer it has been since your bankruptcy discharge, the less influence it will have on your premium rates.

If you are currently going through bankruptcy, you may be denied coverage by some insurance companies. However, each situation is unique and evaluated individually, and some insurers may still offer you coverage, albeit with a thorough review of your finances and bankruptcy repayment details.

The type of bankruptcy you file for also plays a role in determining your life insurance rates. Chapter 7 bankruptcy, which requires the liquidation of assets, will generally result in a decline of your life insurance application until the bankruptcy has been discharged for at least one to two years. On the other hand, Chapter 13 bankruptcy, which involves creating a repayment plan, may offer more leniency, and you may be able to obtain coverage before the bankruptcy is discharged.

To improve your chances of securing more affordable coverage within the first two years after bankruptcy, it's advisable to demonstrate financial stability. This includes having a consistent income and holding stable assets, such as a home or a car, which can justify the life insurance coverage you're seeking. Working with an experienced broker who can compare policies from multiple insurers can also help you find the best rates tailored to your circumstances.

Can creditors seize my life insurance?

In most cases, creditors cannot seize the death benefit payout of your life insurance policy unless you leave the money to your estate. If you name other people as your beneficiaries, the money will go to them, and creditors won't have access to it.

However, if the list of beneficiaries on your policy isn't up-to-date by the time you pass away, or you have co-signed loans with your beneficiaries, creditors may have a right to claim the funds before they are distributed.

To ensure your life insurance is exempt from creditors, it is recommended that you:

• Name a specific beneficiary: Designating a specific individual as the beneficiary, rather than your estate, will keep the proceeds out of reach from creditors.
• Designate contingent beneficiaries: Naming one or more contingent beneficiaries ensures that if your primary beneficiary is unable or unwilling to accept the death benefit, the funds won't default to your estate, where creditors can access them.
• Be mindful of state laws and cash value: If you have a permanent life insurance policy, the cash value may be accessible by creditors, depending on the laws of your state. Some states offer more robust protections than others.

Additional Considerations

• Keep your beneficiaries updated: It is important to update your policy during major life events, such as a divorce, marriage, or death in the family, to ensure that your policy pays out as intended.
• Name a trust as the beneficiary: Setting up a trust as the beneficiary of your life insurance policy can help protect the death benefit from your beneficiary's creditors. The trust holds the death benefit proceeds and pays your beneficiary in installments, rather than a lump sum, shielding it from creditors.

What happens if my insurance company goes bankrupt?

If your insurance company goes bankrupt, you are protected by state governments—specifically, state insurance regulators, who monitor the financial well-being of insurance companies.

When an insurance company runs into financial trouble, the guaranty system in the state where the insurance company is headquartered will take over. All 50 states, the District of Columbia, and Puerto Rico have insurance guaranty associations.

If an insurance company becomes financially unstable and can’t pay claims, the state’s insurance department can take over the company through a process called receivership. The state insurance department will first try to rehabilitate the company to improve its financial situation. If rehabilitation is unsuccessful, the state insurance department can declare the company insolvent and sell off its assets.

If an insurance company is declared insolvent, expect the state guaranty association and guaranty fund to swing into action. The association will transfer the insurer’s policies to another insurance company or continue providing coverage itself for policyholders. It is important for policyholders to continue paying premiums if their insurer is taken over by the state.

If an insurance company doesn’t have enough funds to pay policyholder claims, the guaranty association will use the company's assets and the guaranty funds to pay claims. However, states have a cap on the amount of claims they will pay. Most states limit benefit payouts to the following amounts:

• $300,000 in life insurance death benefits
• $100,000 in cash surrender or withdrawal values for life insurance
• $250,000 in present value annuity benefits
• $500,000 in major medical or hospital benefits
• $100,000 in other health insurance benefits
• $300,000 in long-term care insurance benefits
• $300,000 in disability insurance benefits
• $300,000 for property and casualty claims

There are no caps on workers' compensation claims.

Frequently asked questions