Life insurance is meant to protect the people you love from incurring large expenses upon your passing.
So, what happens if you’re the one with financial problems, and you have filed, or will file, bankruptcy?
How does bankruptcy affect life insurance, and your chance at an approval?
Having a history of bankruptcy can definitely affect your standing with an insurance company.
Every company has different rules regarding bankruptcy, so it is in your best interest to work with an experienced life insurance agent, like us, before you apply.
The right agent can review your financial history, and help you to identify an insurance company who looks more favorably on applicants with a bankruptcy in their past.
We can help you get life insurance with a bankruptcy on your record most of the time.
What’s The Big Deal About Life Insurance With A Bankruptcy?
According to Debt.org, the leading cause of bankruptcy is financial hardship due to large medical bills.
People often burn through their savings to pay off hospital bills for their, or a family member’s, illness.
They are then unable to pay off other debts, like credit cards, mortgages, and even utilities.
Once you have declared a personal bankruptcy, it will remain on your consumer credit report for 7-10 years.
It is standard procedure for a life insurance company to perform a financial check, so they will find out about your bankruptcy as soon as they begin reviewing your application.
Life insurance companies, like health insurance companies, want to make sure the people they insure are healthy and will live for a long time.
They also want to make sure they are insuring people who can pay their premiums in full, on time, for the long term.
They aren’t cold-hearted; they simply have their own expenses they must cover, many of which are front-end loaded.
When a life insurance company sees you have a bankruptcy in your financial history, they have to determine whether or not to continue with your application.
For you, applying for life insurance is free of charge; for the company, there are many different costs associated with processing and reviewing your application.
If the company has reason to doubt you will be able to make payments on a life insurance policy, they could decline you right up front.
Life insurance companies also use different data sets to determine if a person is worth the risk of insuring.
There is data which has been collected about people who file bankruptcy, including:
- Almost 60% of people who file bankruptcy earn less than $30,000 per year
- Nearly 64% of bankruptcies (in 2011) were filed by married couples
- 20% of people who file for bankruptcy have a bachelor’s degree or higher form of education
Life insurance companies understand this data to mean even people who have a form of higher education, and are in seemingly stable relationships, can have difficulty with managing their finances.
And, the company may also wonder if the applicant went into debt due to medical problems.
Data also shows, when people fall on hard financial times, they often stop paying on “extras,” like cable, memberships to clubs and organizations, and life insurance.
Since there are so many up-front costs associated with reviewing your application and offering you a policy, a life insurance company wants to make sure you won’t be someone who stops paying on your policy in just a few short years.
What To Expect When You Apply
When you submit your application to a life insurance company, they take it upon themselves to obtain the following information about you:
- Your overall health, in the form of a medical exam they pay for, as well as by requesting medical records from your doctor
- Your driving record, via a DMV report they request
- Your credit history, which they request and pay for
- Whether or not you have a criminal record, via a background check they pay for
These days, it is quick and easy to obtain a credit check and DMV report, so if any red flags pop up (like a bankruptcy), some life insurance companies will stop the application process and issue a decline immediately.
Other companies will give you the benefit of the doubt, at least until they can determine if you are back on track financially.
If you filed bankruptcy more than five years ago, and you do not have any other red flags in your file, they may continue with your application, and could offer you a policy.
Many times, they want to see you have established a payment plan, at minimum, and you are making payments as instructed.
Best Possible Outcomes
As mentioned above, some life insurance companies have a “zero-tolerance” policy when it comes to bankruptcy. It doesn’t matter if you have a Chapter 7 or Chapter 11, whether you own a business or not, or if the repayment terms are acute or long-term.
They will decline your application whether you have just declared bankruptcy, or the bankruptcy is six years old. A good agent will help you to apply to a different life insurance company, or present you with other policy options.
Some companies are more lenient, and will offer policies to people who appear to be in good current financial standing, do not have a criminal background or poor driving record, and are in excellent health.
Even if all of this is true, you could still be considered a high risk if you have a low paying job and many dependents, or you live in an expensive part of the country.
How To Proceed From Here
Applying for life insurance is a sign of financial responsibility.
You should feel proud you are now in a place in which you can consider life insurance for you and your family, regardless of the past.
Although it is possible to get life insurance after a bankruptcy, it isn’t easy, so we don’t recommended you go it alone.
The best path to take is to work with an us because we know how bankruptcy affects all kinds of life insurance applications.
You will be surprised at how much easier it is to go through the process when you have someone knowledgeable to guide you.