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Does Bankruptcy Harm Life Insurance Prospects?

Why do people get insurance? Out of love and care for their families. Out of a sense of obligation. Out of a need for security.

Why do people file for bankruptcy? To protect their futures and their families. Because they are no longer financially secure and want to find that financial security.

It only makes sense then that bankruptcy should align with life insurance. However, that's not exactly how it works. There is reason to believe that filing for bankruptcy protection hurts people's chances at getting good deals to insure their lives. On the other hand, it may be better to file for bankruptcy in the long-run. After all, isn't life all about the long-run?

Short-term Impacts

Right after you file for bankruptcy protection, your insurance rates will go up—you'll see it in the quotes. However, many people have a tendency to overestimate the impact of bankruptcy in general. The reason your rates go up is mostly your credit score.

After bankruptcy, your credit score will hit rock bottom. However, if you filed for bankruptcy, chances are your credit score wasn't great before. That's why the rise in rates is relatively small.

According to industry experts, life insurance rates are mostly determined by health and habits, and the role of finances is overestimated by consumers.

While your rates may not rise too much, you may find yourself being rejected for coverage outright. This is because you now carry a higher risk of lapsing the policy early. This means that insurers are worried you will have to stop paying and cancel the insurance policy in the early years of coverage. You might think, “Hey, no problem for them! They get my premiums and there isn't much of a chance I'll die right away!” The reality is that insurance providers don't really make money off of you in the first couple years. Their administrative fees and legal fees for you policy are so high that they actually lose a good amount of money if the policy is terminated early.

In the end, bankruptcy will make is so insurance providers will approve less coverage and the types of policies you can get. They may not give you term life insurance, but whole is a better bet.

Long-term Impacts

The idea behind bankruptcy is to give you a fresh start. While your credit might suffer for a few years, make the right changes in your lifestyle and you'll be stronger than you were before in no time! Use your new life as a total rebirth - change your eating and exercise habits as well as your finances.
Long-term, bankruptcy has the potential to really help you, even when it comes to life insurance. Improve your credit score after a few years, your rates go down. Improve your health and get fit, your rates go down again. No problem!

To file or not to file

Either way, bankruptcy will have only a small impact on your insurance. If you are somewhat young and not chronically ill, insurance worries should not be a deterrent.

Since no two insurance providers are the same, once you have filed and gone through the whole process, it is worth the time to compare life insurance quotes.

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