While the COVID death count this week in the United States surpassed 900,000 lives, a horrendous number, many businesses have also “died” as a result of the pandemic. Business and Personal Bankruptcy filings have risen dramatically during the COVID pandemic. Many businesses have closed and forced owners to file for BANKRUPTCY protections. Individuals have also faced a similar financial impact because of COVID as jobs were lost and financial obligations and debts mounted. The question on the minds of many who have experienced these financial hardships is, “Can I Secure Life Insurance Coverage After Bankruptcy? The answer is “Yes”.
Types of Bankruptcy
The Bankruptcy laws were designed to PROTECT both individuals and businesses from being destroyed and liquidated to repay debt obligations. There are three types of bankruptcy filings that underwriters typically encounter:
- Chapter 7 does not stipulate a repayment plan but complete liquidation is required to pay creditors;
- Chapter 13 allows for a restructure of debt obligations over a period of time, usually 3-5 years and;
- Chapter 11 is a reorganization plan most often used by businesses that allows it to continue to function while repaying creditors.
Note, there are standards that must be met before someone can file for bankruptcy protection from the court. It cannot be done randomly. These standards are determined by the Bankruptcy Abuse Prevention and Consumer Protection Act.
Bankruptcy & Insurance Underwriting
Financial underwriting is a very important part of the underwriting process for life insurance policies. Once you “declare” bankruptcy and have taken the proper steps with the courts to protect yourself, your business, and your family, what happens next? Filing for Bankruptcy protection will absolutely have a negative impact on your credit ratings and your ability to receive future credit. It also affects your LIFE INSURANCE application and the underwriting process because of the “George” factor (In the movie classic, It’s a Wonderful Life, George thought that by committing suicide, the proceeds from his life insurance policy would get his family out of debt). Underwriters are acutely aware of the financial challenges people face during and after a bankruptcy. The stress and anxiety, the psychological impact, and the very negative medical effects are factored into underwriting these kinds of “risks”. The underwriter must also understand the motivations behind this new life insurance application for anyone, including an individual currently IN a bankruptcy proceeding – what is the PURPOSE of the insurance protection being requested and WHO will suffer the LOSS if the insured dies. The underwriter looks at the BENEFICIARY designation to help determine if the requested death benefit is justified.
Policy Postpone or Issue & Bankruptcy
Most Life Insurance companies will NOT underwrite a PERSONAL bankruptcy case while it is still active with the courts. AgencyONE requires the DISCHARGE papers from the court as a part of the underwriting package. Without the bankruptcy discharge papers, your client’s case will likely not be considered, and you will receive a postpone. Certain guidelines must be met for consideration of life insurance protection after a bankruptcy:
- The applicant has current EARNED income.
- There has been no prior bankruptcy.
- The bankruptcy filing was accepted by the court (we can check) and the court has DISCHARGED the bankruptcy (document is required if occurred within past 10 years).
- There is no current treatment or history of psychological, mood, or anxiety disorders.
- The proposed insured has a stable family relationship or environment.
- The proposed insured has NO current ratable alcohol or drug use and no ratable history of drug or alcohol treatment.
AgencyONE CAN help get your clients insured who have gone through bankruptcy once it has been discharged. It depends upon the carrier but, in some situations, the case will be denied or postponed for up to 2 years after the discharge. It may be possible to obtain permanent coverage in a shorter period. There is usually a minimum of a two-year postpone for “cheap term” protection as carriers generally do not consider it worth the financial risk to issue a small premium term case. That said, our AgencyONE underwriting team did successfully negotiate TERM coverage for an applicant JUST as his bankruptcy obligations were entirely satisfied.
Bankruptcy & Insurance Case Study
Mr. Carter is a 45-year-old gentleman with a key person term policy and two personal term policies in force. He was looking to secure an additional $1,000,000 of personal term coverage for family protection. One of the two in force personal policies was assigned as collateral to a bank due to a prior business bankruptcy. Mr. Carter was personally liable for some defunct business loans associated with that prior business venture and filed for personal bankruptcy as a result. The bankruptcy was expected to be fully discharged within a couple of weeks of receipt of Mr. Carter’s life insurance application. Over the last couple of years, Mr. Carter has maintained full-time employment with an annual income in excess of $150,000. Medically speaking, he is a healthy and active individual with no rateable medical history. AgencyONE preliminarily approached a few carriers that we believed would be aggressive in these scenarios but encountered only declines and postpones with all but Carrier X. Given Mr. Carter’s nearly full repayment of the bankruptcy obligations, clean medical slate, quick recovery to full-time employment with a good income stream, AgencyONE was able to successfully negotiate a Standard Non-Tobacco offer on TERM coverage with Carrier X.
AgencyONE’s Underwriting Team has the knowledge, experience, and carrier connections to successfully negotiate and place your cases that have even the most complex financial scenarios.