I was watching an episode of Who do you think you are? in which Nigel Havers explored the life of an ancestor in 19th century England. After having been a successful businessman for some time, the ancestor’s business failed big time and he had to declare bankruptcy. In Victorian England, this usually meant that the ancestor and his family would have ended up on the streets or in the workhouse, a total economic and social collapse.
Luckily enough, it turned out that the ancestor had been a (paying) member of an organization called the “Provident Asylum Society”. This organization provided the ancestor and his family with decent housing and a modest income (which continued to be paid to his widow, since the ancestor died shortly afterwards).
I wonder if insurance schemes of this type still exist in the modern world. Are there insurance policies for people who run their own business which will kick in if the business goes belly up?
It depends entirely on the laws of the jurisdiction.
For example, in Canada, the process of bankruptcy protects a portion of the bankrupt’s income from seizure/garnishment by the creditors, and the process the first time around usually only takes nine months. This permits the bankrupt to live modestly while going through bankruptcy. The trick then is to preserve as much of the asset base and ride-out the bankruptcy.
In Ontario, pensions, registered retirement savings with a designated beneficiary, and life insurance with a designated beneficiary tend to be creditor proof. A person can go through bankruptcy with these assets protected from creditors, and then following bankruptcy pull out some of the assets rather than wait for the investments to mature (for example, pull out a sizable chunk while rolling a pension over into a locked-in investment with a designated beneficiary).
In Ontario, even during bankruptcy the income stream of life insurance with a designated beneficiary that is paid to the owner of the policy is creditor proof (Whalley v. Harris Steel Ltd., 1994 CanLII 7330 (ON SC), <http://canlii.ca/t/1vtmf>), so it’s really just a matter of setting up the insurance as an annuity with part of the income being paid out rather than rolled back in. Keep in mind, however, that the law is fluid, so don’t expect what works today to work tomorrow.
Caution: all of the above is highly technical stuff, so don’t rely on this post. If you want to investigate how to use insurance to protect yourself from creditors, hire a professional who is experienced in creditor protection.
Plus, the creation of the limited liability corporation has drastically reduced the need for such insurance. Prior to the development of limited liability, everything a business man in Victorian England owned was potentially liable to be seized by the creditors if his business failed, with no distinction between the assets of the business and his personal assets. The common expression was he pledged everything “right down to his cufflinks.” That’s how you could end up on the street: your house was seized by creditors, your personal property, any personal investments…
The limited liability corporation changed that. It made a clear distinction between the property of the business and the personal property of the business man. If the business failed, the creditors of the business only had recourse to the assets of the business, not to the business man’s cufflinks. (I use “business man” because that was the reality at the time.)
Now, there are still ways for the creditors to get the owner of a business to pledge his or her personal assets (e.g. by signing a personal guarantee for a loan to the corporation), but the combination of limited liability and the protections of modern bankruptcy, outlined by Muffin, provide a lot more financial security for the person going into business.
The landmark case which truly established limited liability in England and by extension the Empire was a decision of the House of Lords in their judicial capacity: Salomon v. A Salomon & Co. Ltd.
In the US, some retirement accounts (e.g. 401k, IRA) have protections against creditors. They are not always 100% protected 100% of the time, but the exemptions are pretty liberal. The idea behind the exemptions seem to be to help a person not end up literally destitute on the street upon retirement.
A crafty lawyer, I’m sure, could probably draw up some technically-legal but abusive tax shelter retirement accounts where one could stash a few million pending a strategic bankruptcy.
Nobody seems to have answered the OP. Are there still private bankruptcy protection policies that are structured as insurance (e.g. pay $X a month, and if you end up bankrupt you will get $Y a month for Z years, a crappy car that at least runs, and a housing voucher good for 5 years)? I understand that there is less of a need for them nowadays, but that doesn’t mean that they are necessarily fully extinct today.
The mutual aid societies or asylum societies weren’t “bankruptcy insurance” per se; they were general old age insurance, comparable (roughly) to modern Social Security except that (a) participation was voluntary and (b) benefits were means-tested.
This form of insurance was particularly useful against bankruptcy, or against creditors in general, because most benefits (especially housing) were paid in kind. The beneficiary didn’t own anything which could be seized, but could live out his or her days in society housing. However benefits were not limited to people who had gone bankrupt.
There is no single exact equivalent today, but certainly there are a variety of government programs and private means by which one can seek to protect one’s self against poverty in old age.
I doubt there are, at least in the U.S., because modern personal bankruptcy laws pretty much insure you’ll get to keep a minimum income, a crappy car that at least runs, and basic housing anyway, without the need to pay a premium.
Between the exemptions available in a chapter 7 liquidation, the myriad possibilities of restructuring in chapter 13, and various welfare programs, in most states you’d have to really work at it to lose everything the way it happened in Victorian times.
Trade credit insurance, director’s insurance, personal liability insurance, medical insurance, personal disability income replacement insurance . . . there are quite a few types of insurance available to insure against problems that could easily lead to bankruptcy, but I haven’t come across any that are specifically set up to insure income for people who are crappy business persons or who are spendthrifts, so I’m not surprised that I have never come across insurance that protects from bankruptcy per se. If there were such insurance, I wonder what the rates would be?
I think spendthrift insurance would carry a pretty hefty premium, since the mere act of applying for it would likely be a bit of a red flag … “I may not be very good at managing my money…”
That’s a good point. There are a lot of interesting ideas for insurance policies that people have come up with. For a lot of them, there’s likely to be a lot of adverse selection, as only those who have a real fear of the outcome are likely to be interested enough to go and apply. Criminal conviction insurance? Deportation insurance? Failing college grade insurance (pays out the full cost of tuition for an F and pays 3/4 of tuition for a D)? Getting banned from a message board insurance? Marital infidelity insurance?
I remember reading about a private unemployment insurance scheme that didn’t last long because the company figured out that people commonly can feel when their job is at risk even before any specific action has been taken and thus there is no specific adverse action to disclose. Boss suddenly acting cold and not keeping you in the loop as much? Sign up for private unemployment insurance right away!