How Bankruptcy Impacts Your Life Insurance Application

How Bankruptcy Impacts Your Life Insurance Application

Understanding the Effects of Bankruptcy on Your Life Insurance Application

Applying for life insurance can be a daunting task, especially when you have a bankruptcy record. This article will guide you on how bankruptcy impacts your life insurance application and the best ways to navigate through this complex process.

Bankruptcy: A Brief Overview

Bankruptcy is a legal status which an individual or an entity can declare when unable to pay their debts. This declaration can have a significant impact on your life insurance application, as it signals financial instability. The focus of this article, therefore, is on understanding how bankruptcy impacts your life insurance application.

The Rising Trend of Bankruptcy in Canada

An increase in the number of bankruptcy filings across Canada has been observed. As per the Office of the Superintendent of Bankruptcy, insolvency filings in November 2023 reached 9,784, marking a 17.5% increase from November 2021. Another report highlights that consumer insolvencies filed in January 2023 were 8,735, a significant jump from the previous year. These statistics suggest that bankruptcy is becoming a common occurrence due to high inflation and interest rates, thereby making it crucial for Canadians to understand how bankruptcy impacts your life insurance application.

Understanding Discharged vs. Undischarged Bankruptcy

Bankruptcy can be categorized into two types: discharged and undischarged.

Discharged Bankruptcy: It signifies that an individual has fulfilled all the bankruptcy requirements and is released from their debt obligations. This type of bankruptcy generally occurs nine months after filing but can extend up to 36 months for second-time bankruptcies. Once discharged, an individual can start to rebuild their financial stability.

Undischarged Bankruptcy: This refers to a situation where an individual hasn’t met all bankruptcy requirements and is still legally responsible for their debts. Reasons may include incomplete paperwork, missing creditor meetings, or late payments. It’s critical to note that certain debts like student loans or child support payments may still need to be repaid even after declaring bankruptcy.

The distinction between discharged and undischarged bankruptcy is important when understanding how bankruptcy impacts your life insurance application.

Implications of Bankruptcy Type on Life Insurance Application

An undischarged bankruptcy is generally viewed more negatively than a discharged bankruptcy. This is because an undischarged bankruptcy indicates that the debtor still owes money, posing a higher risk to insurers. Consequently, they may impose higher premiums or even deny coverage.

On the other hand, a discharged bankruptcy signifies that the debtor has been released from their debts and is no longer obligated to repay them, making them less of a risk for insurers.

The Effect of Multiple Bankruptcies on Your Life Insurance Application

It is not uncommon for some individuals to experience multiple bankruptcies. The reasons could vary, ranging from job loss, illness, divorce, to poor financial management. Regardless of the reason, a history of multiple bankruptcies can pose an additional risk to an insurer. Consequently, underwriting criteria for insurance policies may be stricter for such individuals, requiring a certain amount of time to pass since the last bankruptcy discharge before they can be considered for coverage.

For those with a history of multiple bankruptcies, simplified or guaranteed issue policies could be a viable alternative. These policies usually have less stringent underwriting requirements and require less detailed financial information. However, they often come with higher premiums and lower coverage amounts.

Navigating the Insurance Maze with a Broker

Working with a broker can make the process of finding the best insurance policies much simpler. Brokers can explore multiple options from different carriers to find the best coverage for your individual needs. With their expertise, they can guide you through the maze of options and negotiate the best rates on your behalf.

Final Thoughts

While bankruptcy can make the process of securing life insurance more challenging, it is not an insurmountable hurdle. With time, effort, and the right guidance, you can rebuild your financial standing and secure the life insurance coverage you need. Remember, it’s crucial to understand how bankruptcy impacts your life insurance application, and working with a broker can make this process significantly easier.

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