Life insurance and bankruptcy

Buying new coverage

Term life underwriting is driven by health, age and lifestyle. A bankruptcy on its own does not make you uninsurable.

Some insurers do consider credit information in underwriting, and practices vary considerably. For anyone with a recent bankruptcy, that variation is another reason to work with someone who knows carrier appetite rather than applying blind.

An existing policy's cash value

This is where it matters. Term life has no cash value and generally isn't an asset. Permanent policies do, and cash value may be an asset in a bankruptcy.

Many states exempt life insurance cash value from creditors, sometimes entirely and sometimes up to a limit, and the rules differ substantially between states and between federal and state exemption schemes.

Do not surrender, borrow against, or transfer a policy before taking advice. Moves made shortly before filing can be scrutinised, and an action intended to protect a policy can achieve the opposite.

Keeping coverage in force

The worst outcome here is letting a policy lapse during a difficult period and finding it unaffordable or unavailable later, particularly if health has changed.

If premiums are the problem, ask about reducing the death benefit, changing the payment frequency, or non-forfeiture options that keep some coverage in force. Any of those beats a lapse.

Beneficiaries

Death benefits paid to a named beneficiary generally pass directly to them rather than through your estate, which is part of why naming a person matters.

If your estate is the beneficiary, the money can be exposed to creditors. Check your designations, and take advice on the specifics.

What to do, in order

• Speak to a bankruptcy attorney before touching any policy
• Don't surrender or borrow against cash value on your own initiative
• Keep term coverage in force if you possibly can
• Check beneficiary designations name people rather than your estate
• If you need new coverage, use someone who knows which carriers to approach