What Happens To Life Insurance When I Declare Bankruptcy?

Understanding the Impact of Bankruptcy on Life Insurance Policies

Bankruptcy is a complex process that can affect different aspects of a person’s financial life, including their life insurance policies. This article deciphers the intricacies of what happens to life insurance when individuals declare bankruptcy. As a Licensed Insolvency Trustee (LIT), I am often faced with three primary questions related to life insurance during bankruptcy:


  • How does bankruptcy affect a term life policy I own?
  • What’s the impact on a Whole or Universal Life policy I own that has cash value?
  • If I’m the beneficiary of a life insurance policy, what happens if the policyholder passes away during my bankruptcy?


Valuing Assets in a Bankruptcy Scenario

When bankruptcy looms, the LIT must assess the value of your assets to determine if any equity is potentially available to your creditors, considering exemptions under Provincial or Federal legislation for specific types of assets.

Term Life Insurance and Bankruptcy

Term life insurance is akin to car insurance, where the insured is the individual rather than a vehicle. This policy type typically has a fixed term (often 5, 10, or 20 years) and a set monthly premium.


“It’s heartbreaking to imagine a loved one’s legacy being absorbed by bankruptcy proceedings.”


The policy is void if you stop paying the premiums before the term ends. Unless the policyholder passes away during the term, the policy holds no value for the policyholder or the designated beneficiary. Consequently, it has no value for your bankruptcy estate, and your trustee will not require any payment for it. If the policyholder dies during bankruptcy, the trustee has no claim over the payout, which goes entirely to the beneficiary.

Whole Life or Universal Life Policies in Bankruptcy

Whole life and universal life policies are considered “permanent” policies designed to last the policyholder’s lifetime. They often have a savings component, which can accumulate cash value. This cash value is what matters in a bankruptcy scenario.

This cash value is considered an investment asset and becomes an asset that the LIT must account for in a bankruptcy situation. However, under provincial legislation, these assets will be exempt from seizure by your trustee if the designated beneficiary of your policy is a spouse, common-law partner, parent, child, or grandchild. If the policyholder passes away during the bankruptcy, the trustee cannot claim the payout, which goes to the beneficiary.

The Impact on Beneficiaries During Bankruptcy

If you’re a beneficiary of someone else’s policy and the policyholder dies during your bankruptcy, the payout becomes payable to your bankruptcy estate. You will not benefit from it unless your creditors are fully paid.

If you’re considering bankruptcy and believe that a person who has named you their beneficiary might pass away during your bankruptcy, it’s worth discussing with them. They might choose to change the beneficiary to prevent their gift from being absorbed by bankruptcy proceedings. They can reinstate you as a beneficiary once your bankruptcy is complete.

Life insurance is a crucial issue for many, and it’s usually bought more for the protection it offers loved ones than as an investment. Clients declaring bankruptcy often worry about the fate of their assets, and LITs understand these issues’ deeply personal nature. If you’re anxious about your life insurance, your home, or other assets, don’t hesitate to reach out.

These reasons, among others, are why many people prefer to file a consumer proposal instead of declaring personal bankruptcy.

Bankruptcy Canada is a Licensed Insolvency Trustee. We are experienced, hands-on insolvency practitioners who understand the personal impacts of significant financial stress;


  • We don’t adopt a one-size-fits-all approach.
  • Our supportive and experienced team will promptly respond and resolve your issues.
  • We’ll review your debt solution options, including filing a consumer proposal and both types of personal bankruptcy.
  • We assist Canadians with overwhelming debts to make fresh financial starts.


Once you file a consumer proposal or personal bankruptcy, we handle your creditors directly. Your unsecured creditors must cease contacting you or continuing legal proceedings against you. Contact us for a free consultation.

We offer free consultations to review your financial situation and practical debt resolution options. Contact us to discuss your situation over the phone, a video chat, or in-person.

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