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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I have a joint life insurance with my wife paid on first death. i am now bankrupt and being told to buy back my insurance for £50 but it is in my wife’s name also and she is not bankrupt she is therefore being penalised for my Bankruptcy
Hi Sid
Regardless of whether your life policy is in joint names, if you have gone bankrupt, you must pay the official receiver £50 to buy back your interest in the policy from them. If you don’t and you continue to pay the policy premiums, it will be worthless if you die and your wife tries to make a claim. In these circumstances, the pay-out would go to the OR even if you die after you are discharged.