Bankruptcy is a stressful time to say the least. Among the many concerns and questions you may have, you may be wondering what happens to your life insurance policy, if you have one, after you file bankruptcy.
The answer depends on the type of life insurance you have and the type of bankruptcy you have declared. Keep reading to learn more about what happens to life insurance during bankruptcy.
What is bankruptcy?
Bankruptcy is a legal process that allows individuals or businesses to declare that they are unable to repay their debts. It is a formal declaration that you cannot meet your financial obligations and that your assets are insufficient to cover your debts.
Usually you file for bankruptcy in court. When the court approves the bankruptcy petition, an automatic stay is put in place that prevents creditors from pursuing collection actions against you. This means that once you start the bankruptcy process, you don̵
7;t have to worry about additional legal notices arriving at your door. Bankruptcy auditors will communicate with your creditors and let them know that there is a plan for repayment.The goal of bankruptcy is to provide a fresh start for individuals or businesses burdened with debts they cannot pay. There are several types of bankruptcy, but the most common are Chapter 7 and Chapter 13.
- Chapter 7 bankruptcy is also known as liquidation bankruptcy. It involves selling assets to pay off creditors, and any remaining debts are paid off or eliminated. In exchange for your debts being paid, you may be required to hand over certain assets to be sold – these funds will then help repay creditors. Depending on the type of life insurance you have, you may be required to surrender a portion of your life insurance value to creditors as a full or partial debt write-off term.
- Chapter 13 bankruptcy is also known as restructuring bankruptcy. It involves creating a payment plan that allows you to pay back some or all of your debt over three to five years. The payment plan is based on your income and expenses, and any remaining debt is paid at the end of the payment plan.
Bankruptcy has serious consequences, such as damaging your credit score, and you may lose some of your assets. But for some people, bankruptcy may be the best option to get out of debt and start over.
Know that if you are forced to file for bankruptcy, there will be serious restrictions on your future ability to use credit and borrow money. Even if you have debts, it’s a good idea to consult with a bankruptcy attorney before deciding to file.
Is my life insurance subject to seizure in bankruptcy?
In short, yes… depending on the type of policy you have.
If you have a term life insurance policy, it usually doesn’t accumulate cash value, meaning it can’t be used to pay back your creditors. The result is that your policy will remain in place, provided you can still make your premium payments. (See below.)
If you have whole life insurance or another type of permanent life insurance, it is likely make collect cash value. This cash value can be used to repay your creditors, although there is a federal exemption of $14,875 – meaning any value above that amount is subject to garnishment. (Some states provide additional exceptions. Your bankruptcy attorney should be aware of these.)
Depending on your financial situation, including whether you can pay future premiums, your policy would remain in place.
What happens to my life insurance if I can still pay my premiums?
If your policy is left in place under the terms of your bankruptcy agreement and you can still afford to pay the premiums on that policy, your policy will remain in place. Your loved ones will also still be entitled to the death benefit in the event of your death.
What if I can’t pay my premiums?
This is obviously the bigger question.
If you have a life insurance policy (such as Haven Term from Haven Life) and you cannot pay your monthly life insurance premiums, your life insurance issuer will likely cancel the policy.
You will not get back the premium payments you have already made, and your beneficiaries will not receive a death benefit in the event of your death. Essentially, it will be as if you have canceled your policy. (With Haven Life, there is a 30-day grace period, and your policy will lapse if you don’t make a payment after the time is up.)
If you have whole life insurance, your policy usually has a cash value that grows over time. If you are unable to make payments, it is possible that the accumulated cash value may cover your premiums for a period of time. If not, your policy will lapse, and your beneficiaries will not receive a death benefit in the event of your death. Again, it’s like you’ve canceled your insurance.
Additionally, the cash value from your whole life insurance policy can be used to pay off your debts as part of the bankruptcy process. If this happens, and you cannot make future payments, your policy will lapse.
Can I still get life insurance after bankruptcy?
If you need to replace a life insurance policy that was lost during the bankruptcy, you can apply for a new policy during or after the bankruptcy, but it will be more difficult than it was before. Not only are you older (which will translate to a higher premium), but insurance companies review your credit score and may offer you higher premiums as a result.
You may also have to wait – for example, if you filed for Chapter 7, you may have to wait a year or two before an insurer will offer you insurance, because of the risk. If you filed for Chapter 13, you will likely face fewer restrictions, but you will still be offered a higher premium for the same coverage.
Suffice to say, bankruptcy is an incredibly difficult time. If you have questions about an existing Haven Term policy, you can contact us and we will be happy to help. If you are interested in applying for a new policy, start by getting a free quote online today.
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