Can Life Insurance Proceeds Be Claimed by Debtors?
Life insurance proceeds go directly to a named beneficiary upon death of the named insured. It is divergent from other methods of providing financial security to a beneficiary after death, in that it can only be legally used for the strict purposes that it was set up to accomplish.
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Function
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A life insurance policy is designed to provide financial benefits to the named beneficiary and cannot be altered or assigned, except by the policyholder, with the authorization of the named insured. It is designed to pay benefits to a specific party or parties and cannot be diverted, even in a court of law.
Debts of Deceased
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The debts of the deceased survive him only to the extent of assets that are part of an estate. These assets can be attached by debtors before they pass on to survivors. Life insurance is not part of the estate.
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Term Life
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Because a term life insurance policy only provides financial benefits when the insured dies, the benefits go directly to the insured and belong only to the beneficiary, who has no obligation to the debtors of the insured. Term life carries no cash value until death of the insured.
Whole Life
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While a whole life insurance policy has what is referred to as a “cash value account,” which may be cashed out or even borrowed against, that portion of the policy can only be attached if the insured cashes out or borrows against the cash value account while still alive and places it in a bank.
Investment
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An investor who holds a life insurance policy on a named insured is only a party to the business relationship the insured has with the investor and the business. Any life insurance policy that an investor holds is separate from the personal estate of the insured and cannot be attached by personal or business debtors.
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References
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Comments
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This is useful information.
