Advanced Underwriting Consultants

Question of the Day – November 21

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: My client’s father passed recently, and she is the beneficiary of his life insurance policy.  Is the life insurance death benefit subject to the claims of the client’s creditors?

Answer: Most likely, yes.

Many states protect the death benefits of life insurance from the claims of the policy owner’s creditors.  In addition, there may be federal protections or probate safeguards that prevent a deceased’s creditors from being able get at life insurance proceeds paid to a named beneficiary.  Those protections generally do not extend to the IRS as a creditor.

On the other hand, life insurance proceeds paid to a beneficiary are not generally protected from the claims of the beneficiary’s creditors.  Once the beneficiary gets the death proceeds, they become cash.  Cash is reachable by creditors.

Check your state rules with a local bankruptcy or asset protection attorney for a final answer on all creditor protection questions.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.