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Taking Care of Mom and Dad: Chapter 7 - Insurance and Creditors

One of the unique features of life insurance is that the life insurance proceeds are exempt from the claims of the policy holder's creditors as long as there is a named beneficiary other than the policy holder's estate. Even the cash value of a life insurance policy is generally protected from creditors.

This can be a big deal, if you're anticipating a life-ending illness that may drain your parents of resources.

Although the life insurance contract is between the policy holder and the insurer, once that person has died, a contractual arrangement exists between the insurer and the beneficiary. The beneficiary has a right to sue the insurer if payment isn't received in a timely manner.

The spendthrift clause common to many policies is designed to protect the beneficiary from losing proceeds to creditors, assigning the proceeds to others or spending large sums recklessly.

The spendthrift clause is not applicable to lump sum settlements but is operative with settlement options. It only protects the portion of proceeds not yet paid (due, but still held by the insurer) from the claims of creditors to the extent permitted by law. As long as proceeds are paid according to a settlement option in which the insurance company keeps the proceeds and sends a monthly payment to the beneficiary, then the amounts received by a beneficiary are exempt from the claims of the beneficiary's creditors.

This provision allows the insurer to select a beneficiary if the named beneficiaries cannot be found after a reasonable amount of time. To facilitate the payment of the death proceeds, the insurer may select a beneficiary if this provision is in the policy. This provision is found most often in policies with small death benefits, such as industrial life insurance. The insurer would usually select someone who is in the family's immediate blood line (a brother, sister, aunt, etc.).

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