Due to mounting economic pressures, lay-offs, and rising costs of living, people are finding themselves more and more deeply entrenched in debt, and for many, bankruptcy is the only way out. Many people see this as the worst possible predicament but while there is a degree of social stigma and loss of assets, all is not lost. Being bankrupt does not mean you necessarily lose everything you have. In fact, the government protects some of your assets to ensure that you are given a fair chance to start your life anew. Depending on the state and federal laws applicable to you, and the type of bankruptcy you file, you can retain at least a part of your life insurance coverage, which means that at least your beneficiaries will receive the financial protection you have striven to give them.
The first thing to remember is that the laws concerning bankruptcy and the seizing of assets vary from state to state, and this holds true for life insurance as well. A term life insurance policy has no investment value, and will not benefit you in your lifetime. Hence, this is not considered an asset and will, in most cases, be left untouched. If you, on the other hand, are a beneficiary and your loved one dies during bankruptcy, then the payout from the life insurance policy can be seized by your creditors. As a policy holder however, a term life insurance policy is the safest bet. Since there is no actual cash value accumulated, and it cannot mature until your death, this policy may be exempt from the assets taken by your creditor. After all, the payout of a life insurance policy could go towards the family’s welfare, the deceased’s funeral costs, and fulfilling basic needs. In the absence of a life insurance policy, the state would be responsible for the family’s welfare and the deceased’s funeral, so in many states, if the debtor purchased and paid for a life insurance policy before declaring bankruptcy, the life insurance policy will be exempted from the assets.
Whole life insurance works differently; it accumulates cash value that not just your beneficiaries, but you as well can avail of. This means that you can borrow from it, or even choose to cash out before you die. As this is considered a potential asset, depending on your policy, the beneficiaries, and which state you are from, the surrender balance of a whole life insurance policy can be liquidated to pay off creditors. However, in many state, as long as your beneficiary is a family member who is financially dependent on you, your insurance policy is exempt and protected. Others allow approximately $10,000 as exempt from being used to pay off creditors.
An important thing to note is that while your term lifeinsurance policy may be protected in the event of bankruptcy, your premiums are likely to rise after you declare bankruptcy. However, this may not necessarily be enough reason to opt out of declaring bankruptcy; bad credit ratings have an adverse effect on your rates. Considering the fact that people declare bankruptcy because they are pushed to their absolute financial limitations, not declaring bankruptcy may affect your scores negatively anyway. Another dilemma is whether you should buy life insurance after declaring bankruptcy, or wait out the decade it takes for your credit score to stop reflecting that you went bankrupt. Firstly, you never know how long you have left to live, and by remaining uninsured for such a large period of time, you may be putting your loved ones’ well being and financial security at grave risk. Rick Bergstrom, an actuary and member of the Society of Actuaries states that bankruptcy does not necessarily affect insurance premiums by a grave margin; the most frequent problem people face is that they may have trouble getting approval for the amount of coverage and the kind of policy they seek.
All in all, even the government recognizes how vital life insurance is in protecting the interests and financial future of loved ones and dependants. Bankruptcy is offered as a means to break out of the trappings of misfortune and errors, and build a life anew, not to debilitate chances of you and your family finding financial stability. While life insurance rate and coverage may get affected to some degree, they are protected by the federal and state laws to a great extent.
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