Life Insurance and Bankruptcy
- 03 Feb 2022
If you go bankrupt you will lose the benefit of your life insurance policy. To avoid this, you will need to buy back your interest from the official receiver.
Jump to article content:
- What happens to your life insurance?
- Can you keep the benefit of your policy?
- Should you cancel your insurance?
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What happens to your Life Insurance Policy if you go Bankrupt?
Bankruptcy will have a serious affect on your life insurance policy. In the event of your death, any pay out from a policy that existed on the date of your Bankruptcy forms part of your Bankruptcy estate.
This means that any money paid will automatically go to the Official Receiver (OR). It will then be used to pay off your debts and the additional costs of your Bankruptcy.
Only after all of your original debts, costs and statutory interest are paid will any remaining cash be handed back to the beneficiaries of your Will.
After you go Bankrupt any life insurance benefit in the even of your death is paid to the OR. You can protect against this by buying back the interest in your policy.
Can you keep the benefit of your Life Insurance Policy after going Bankrupt?
There is a simple way to protect the future benefit of your life insurance policy. This is to buy back your interest from the Official Receiver. You will get the opportunity to do this after you have gone Bankrupt.
You will be required to pay a standard fee of £50 per policy. A letter will then be sent to you from the OR confirming that they have no further interest in the policy. After this any future pay out should go to the named beneficiaries.
After you buy back the interest in your policy you must continue to pay the ongoing monthly premiums. You will be allowed to include a budget for this in your living expenses budget as long as they are not unreasonably high.
If you die before you are discharged, any benefit paid as a result of a life insurance policy will go to the Official Receiver. This is the case whether you have bought back your interest in the policy or not.
Should you cancel your Life Insurance Policy if you go Bankrupt?
If you can’t afford to buy back your interest in your life insurance policy, you could borrow the funds required from a family member or friend. However if raising this sum is simply not possible, an alternative option is to cancel the policy.
Once you are discharged there is nothing to stop you taking out a new policy. Because this begins after your bankruptcy is over, any benefit derived if you subsequently die is paid out as normal. It will go directly to your beneficiaries and not the Official Receiver.
If you cancel your life insurance policy, the benefit if you die will also be cancelled. It might not be be impossible to start a similar policy after you are discharged for the same monthly premium. Given this, you should not decide to take this course of action before taking advice from an independent financial advisor.
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Thanks James. That is much more clearer now.
I would just like to add a different scenerio into the equation if I may, which also may also help other readers in the future!
One of my insurances is a critical illness policy. But what if I started investigation into a suspected cancer or condition that is claimable under the policy a few months after purchasing this policy (this is a new condition that isn’t documented in my medical files prior to bankruptcy). After a further 3 months of investigation (still within the bankruptcy year) it turns out to be a condition the insurance pays out on a few months later, once all medical proof has been gathered. Then the money is paid out after discharge. So, because the investigations were started during the bankruptcy, would the funds still be an asset (windfall) of the OR? Or if the medical results are not conclusive till after being discharge, does this have an impact on the OR’s claim anyway?
Infact, does a critical illness payout, which is designed to support a person during a severe health become an asset of the OR even in part?
The same above questions, could be asked if one had an accident during their bankruptcy, but as it may take a year or move to prove to the insurer the effect the accident has had on your life in order to recieve the correct funds, therefore delaying payment long after the bankruptcy has finished!
Thank you again on behalf of myself and others with similar questions, for your endeavours to clarify and enlighten us on the above.
No problem Rick. I am glad I am able to help.
The question you ask is important. The general rule is as follows: If the thing that triggers the eventual receipt of a windfall happens before the date you went bankrupt or during the period of your bankruptcy then when the windfall is eventually paid it remains after acquired property. As such it would still have to be paid to the OR.
The best (and currently most common) example of this is PPI compensation. If you claim for mis sold PPI after you are discharged from bankruptcy (against PPI sold to you prior to your bankruptcy) then any compensation is still payable to the OR. Even though you did not make the claim until after discharge the opportunity to claim existed at the time you were bankrupt. As such any such
Hi. Im a bit confused with buying back my insurance policies whilst bankcrupt. You mention in your previous comments that once purchased back, the OR has no more interest in that policy. I’ve just purchased 2 of my insurance policies back, but the OR confirmation letter does state that if a claim is payed out prior to my discharge (a few months from now), then they still have a claim on the policy.
So am I wrong in thinking that the full 12 months must be fulfilled before I have complete control of my insurances? Can you clarify legally were I stand from the date of purchasing my insurance policies please?
Hi Rick
I assume you have received the letter LTBPOL from the OR. You are correct. Within the letter it states that having paid the £50 fee the interest in your life policy returns to you. However if you die before you are discharged you will still lose the money.
This is because any insurance payout received as a result of your death before discharge would be After Acquired Property (in other words a windfall). All windfalls you receive (or your estate receives) in the year you are bankrupt or as a result of an event that happens during the year you are bankrupt (i.e. before you are discharged) are treated in this way and would have to be handed to the OR.
As such buying back the interest in your life policy only protects future payouts if you die AFTER your discharge date. The original article above was not clear enough in this regard. It has now been amended to reflect this important situation.
Hi I have just discovered I have critical illness cover and they noticed there is a note on the account about my husband being bankrupt. He has been discharge for about 7 years will they still have an interest in any payout we might get for critical illness for myself
Hi April
It is only life insurance policies that were in your husband’s name at the time he went bankrupt which you need to worry about. As such if the critical illness policy is in your name there is no need to worry. The Official Receiver has no interest in this policy. If the policy was in joint names then the OR only has an interest in your husband’s benefit from the policy. As such if you were to become ill and claim the money would go to you.