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When Filing for Bankruptcy, What Happens to Your Life Insurance?

A life insurance policy is essential to protect your financial stability and your family in the event of your sudden demise. Life insurance is encouraged for every earning professional by financial advisors. Bankruptcy is a major setback for individuals and can come with several consequences, including the loss of life insurance. Understanding how bankruptcy impacts life insurance will help you understand the potential impact of a bankruptcy filing on your coverage.

In this blog, we’ll discuss how bankruptcy impacts life insurance!

Whole Life Vs. Term Life Insurance

These are two common types of life insurance that provide different coverage and financial benefits in the event of a death. After filing for bankruptcy, it may be possible to reinstate a life insurance policy, but you should speak with an insurance professional before doing so.

Under the Federal Bankruptcy Code, a term life insurance premium is not an asset. Term life insurance doesn’t have a cash value until the policyholder passes away, which means it can be reinstated quickly after filing for bankruptcy.

On the other hand, whole life insurance policies are more complicated because they carry a cash value that can be used to pay policy premiums after the policyholder’s death. Whole life insurance allows a policyholder to borrow against the cash value if they need to; however, this can make them liable if they don’t pay a certain amount as a surrender fee. For this reason, the bankruptcy code considers the whole life policy as “property of the estate” and therefore, the policy can be claimed by creditors during the liquidation process.

Life Insurance Proceeds

Your life insurance proceeds will be considered an asset upon filing for bankruptcy. This means that the proceeds can be used to pay off debts owed to creditors or sold to pay off your debts and other financial obligations. In the event of your demise, your beneficiaries will be entitled to receive the full proceeds from the insurance policy and pay it to your creditors.

Remember, life insurance proceeds that were only received shortly before or after you filed for bankruptcy are eligible to be used as an asset to repay your creditors. These proceeds are determined as assets under the 180-Day Rule. Any funds received before the 180-day period will not be subject to forfeiture and may be considered exempt by the bankruptcy court.

Life Insurance After Bankruptcy

The challenges of life insurance and protecting assets continue after bankruptcy as well. Many people find it challenging to qualify for a new life insurance policy after filing for bankruptcy. Fortunately, it is relatively easy to find an insurer once your financial status improves and you qualify to buy a new policy.

The impact of bankruptcy fades over time, especially if you got a discharge and are working to rebuild your credit. Most insurance companies are happy to assist those looking for insurance after an unfavorable credit history. However, you must be willing to pay a higher premium for it. Insurance companies consider your credit score and other factors, such as your age and health, when deciding on your policy premiums.

Additionally, if you filed for Chapter 7 bankruptcy, you may not be able to qualify for a term life policy for at least two years. In this case, you will have to look for another type of life insurance instead.

Discuss With Your Life Insurance Agent

Whether your life insurance proceeds are going toward your bankruptcy creditor repayment or not, you will still have to list and register them. Make sure to talk to your life insurance agent to learn how you can exempt your proceeds and assets.

If you’re looking for a life insurance company in Texas, Franklin Life & Annuity is your best option for it! As a leading life insurance provider in Houston, we can offer family life insurance or final expense insurance for you!

Get in touch with us today to get started!

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