You purchased a life insurance policy as a way to provide your loved ones with financial security when you pass away. While your policy can help your surviving loved ones that are listed as beneficiaries, like most people, you probably aren’t aware of the fact that your policy can also benefit your creditors.
If you have a lot of debt and you are wondering if your creditors can go after your benefits, it’s important to find out if your policy – and more importantly, your beneficiaries – will be protected from creditors, and if so, whether or not there are limitations to those protections.
It Depends on Where You Live
If you do have outstanding debts after you pass away, there is a chance that creditors will be able to go after the benefits of your life insurance policy in order to pay off your debts; however, that’s not always the case. Whether or not your life insurance will be garnished for debt depends on the state you live in. Ideally, you will avoid debt, but you may still need life insurance.
For example, in some states, life insurance is protected from creditors; in other words, creditors cannot garnish the benefits of your policy to pay for your outstanding debts. But, some states only offer limited protection for life insurance. For instance, in the state of Texas, a life insurance policy’s cash value and death benefit are completely protected from creditors, meaning that the policy cannot be garnished for debts. In the state of Florida, on the other hand, only the cash value of a life insurance policy is protected and cannot be garnished for debt, as long as the person who is insured is still living; however, after the insured passes away, the benefits of the policy are no longer protected by the state. That means that creditors are able to garnish the benefits of the policy and take the money they are owed before the beneficiaries listed on the policy will receive their payout.
Cash Value and Term Life Insurance Policies
With cash value life insurance policies, like whole life, premiums will be deposited into a separate account, known as a cash account, after expenses, such as the cost of your insurance, are deducted. Typically, an annual charge will also be applied.
Generally, with a cash value policy, there is a minimum amount of dividends; usually between 2 and 4 percent. You are allowed to borrow or withdraw money from your policy; however, the amount that you withdraw may be taxed. The major disadvantage of a cash value policy is that you may not be able to afford the annual premium, and if that happens, you may have to cancel your coverage. In this case, when you do pass away, your beneficiaries will only receive the value of your life insurance policy; they will not receive the amount that you paid into the policy.
Term life insurance policies are another option. As the name suggests, this type of policy will only last for a predetermined amount of time; 20 or 30 years, for example. However, while the amount of time that the policy lasts is limited, the amount you will be required to pay on the monthly premiums are less expensive than the amount you will have to pay on cash value life insurance policies, such as whole-life.
Are Life Insurance Policies Ever Susceptible to Creditors?
While the state that you reside in does determine how protected your life insurance policy is from creditors, there are other instances that can make these policies more susceptible to creditors. For instance, if any beneficiaries of a life insurance policy are still living when the insured passes away and they have co-signed loans with you, creditors can file a lawsuit against the beneficiaries in order to receive the amount that is owed for the outstanding debts from the payouts of your policy. If any of the listed beneficiaries didn’t co-sign any loans with you, but you have loans that are outstanding, your beneficiaries may have to use the payouts from your policy in order to cover the outstanding debt. They may also have to use some of the payouts to pay for any taxes that have been placed on your estate.
If you have named your estate as the beneficiary of your life insurance, or if the beneficiary you have named has passed away, your life insurance payouts are particularly vulnerable to creditors. For example, there is a chance that the assets listed in your estate will need to be liquidated in order to pay off any outstanding debts, which could include your life insurance. If this happens, any living beneficiaries will only receive a payout from your policy after your debts have been paid off.
Protecting Your Life Insurance from Creditors
In order to find out how you can protect your life insurance – and your named beneficiaries – from creditors, speak to your insurance agency. There may be ways to successful ensure that the payout from your policy will not be used to pay off debt.
I am a beneficiary of a death benefit I live in Iowa and do have debt. Any way I can protect my benefit without it going to creditors plz help.
You could possibly have a trust set up in your name and the owner can make the trust the beneficiary. This is a question best left for lawyers though so check with them. Once the policy pays to you it is an asset your creditors can potentially pursue.
Can a debt collector in New York State garnish my checking acct which money is from my husbands life insurance policy I received after his death
i live in wisconsin and i am a senior..years ago i borrowed on my life insurance policy and i will never beable to pay it back..the policy has lapsed but i owe 3000 dollars in money and interest..can the garnish my social security check?
You should not owe the life insurance company any money. This sounds like a scam. Check with a financial advisor to be sure that it is real. Normally the policy will just lapse without anything owed.
In-state of Hawaii can life insurance be garnished by creditors.
I live in ohio. Can my life insurance be garnished if i name my adult children as beneficiaries?
You will need to check with an attorney regarding your specific situation and the applicable state laws. Naming your adult children as beneficiaries should not prevent garnishment if it is otherwise allowed by law.
I live in Iowa and my wife recently passed away and did not name anyone as her beneficiary. So I get a letter from the life insurance company that it will be paid to the estate of her. Unbeknownst to me she had credit card debt. Will her credit card debt be taken out of the life insurance? My name isn’t on any of her credit card debt.
Yes, the entire estate will be subject to probate. Unfortunately, this is why it is so important to name a beneficiary.
I am on probation in the state of missouri, and my daughter passed away, will they take my legal fines, hospital Bill’s, and such to pay for the debt I have accrued?
Sorry to hear that your daughter passed. Yes creditors can have a right to proceeds if it is your debt. If it was the insured persons’s debt, it is much less likely they can access the money.
My mom lives in Wisconsin and I’m her only living survivor, as well as her POA I’m having a difficult time with one of her policies , they continue to give me the run around on information I’m trying to receive . My sister was the beneficiary on this policy, she passed away 2-years ago. When my mom passes will I be entitled to this policy?
It sounds like you may not currently be listed on the policy. If you are not the beneficiary, and no other living beneficiary or secondary beneficiary is living, the money will be paid to the estate. The estate will be subject to probate and distributed according to the will, or as the judge decides.
I live in FL with my son, a minor, his non-custodial parent (obligor) lives in CA. If the obligor dies while owing arrears on child support will the beneficiary of their policy be required to pay their child support debts?
This is a question for an attorney. I doubt that the beneficiary will have their benefit reduced, but I do not know this. I would guess that it would be easier to force the policy to be surrendered for cash while the obliger is alive if they are in arrears.
I have a Federal Parent Plus school loan I took out. If I die it appears that the loan will be discharged. Can life insurance proceeds to my wife as beneficiary be attached? The loan was signed only by me years before I married my current wife. Thanks
Hi Jack,
That sounds like something that you would need to discuss with your wife. Debts can transfer to next of kin or spouses in case of death, but that is partly the value of life insurance, to be able to handle those debts. Life insurance usually isn’t assigned to a specific thing, but if the debt is still there after you pass away, then your wife could use that money to pay off the debt and any other debts, such as a mortgage or car loan. It sounds like you should find out the details of the loan and then discuss with your wife what she could do with the money.
My son owes quite a bit of child support. I live in MA and am wondering if the DOR can take that money for child support in arrears?
Great question! I would check with a lawyer to be certain. I assume that if he is paid a death benefit and now owns the asset, that YES, they can take the money in arrears.
I made out a will for the sale of my home my other 2 sons would get 1/3 of life insurance. I put it to my son who lives in MA. He will take care of everything so he needs the insurance to pay for my final wishes