Laura Berry is a former State Farm insurance producer and insurance expert.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Car Insurance Agent

UPDATED: Feb 15, 2017

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Don't miss these facts...

  • In most cases, the beneficiary of a life insurance policy is not liable for the benefactor’s debt, and therefore proceeds are protected from creditors
  • Naming the estate as a beneficiary leaves the door wide open to creditors.
  • Debts you incur after receiving life insurance proceeds are not exempt from your creditors.

When an individual is the named beneficiary of a life insurance policy, the proceeds are paid directly to this person, when the owner dies. They are protected from creditors.

Creditors of the deceased may contact you and try to collect on the debt, however, you are not obligated to pay for the deceased person’s debts. The debt collector can make a claim against the deceased person’s estate.

The court’s, or an executor distribute assets from the deceased’s estate. This is done through the process of probate.

If the person had cash in a checking account that had no beneficiary, it would go into the estate for distribution. Houses, cars and other tangible assets owned singly by the deceased, would go into the estate for distribution.

Creditors can make claims against the deceased’s estate and if there are assets there, they will be used to pay off debts.

If there is not enough cash, assets will be sold to satisfy debt collectors. After all debts have been satisfied, the remaining assets will be distributed to heirs of the estate.

Learn more about debt collectors and their rights to your life insurance below and make sure to use our free insurance comparison tool above!

When the Estate of the Deceased is Named as the Life Insurance Beneficiary

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As mentioned above, assets that are in the estate are subject to debt collection proceedings. If life insurance proceeds are paid to the estate, they are subject the claims of creditors.

Some people want to make sure their mortgages and other debts are paid, so they have the insurance proceeds paid to the estate. This allows the home and other assets to pass unencumbered by debt to the family.

Upon the death of the policy owner, the money is paid the estate.

Debts and other claims against the estate are first paid, and the proceeds remaining are distributed to the heirs.

If there is not enough cash in the estate, assets will be sold to pay creditors. If heirs want to retain homes or other assets, they will have to cover debts or lose the assets to creditors.

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Exceptions to Debt Collectors Gaining Access to Life Insurance Money from Individuals

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There are a few different types of debt that play a part in the debt collectors collecting life insurance money. These types are listed below:

– Joint Debt

When the insured has co-signed on a loan with you, and they die before the loan is fully paid, they can collect the amount from the insurance company upon the insured’s death.

An example might be if your parent co-signs a loan with you. When they die, the creditor can collect from the life insurance company first.

– Spousal Debt

If the spouse inherits the estate, and they shared debt during their marriage, creditors can get repayment from the surviving partner.

They would not go after the proceeds paid the surviving spouse, but still hold the spouse liable for the joint debt individually.

– Beneficiary Debt

When a beneficiary has unpaid debts, creditors who may gain knowledge of life insurance money being paid may be able to go after the person for debt payment, simply because they know the person has received a lump sum of money.

They don’t actually go after the proceeds from the insurance company.

When you receive money from a life insurance policy, and you later accrue debts or have current unpaid debts, the proceeds are not protected from your creditors.

In other words, after the fact, the money has been paid out, it is possible for your creditors to make claims against it. So, the proceeds cannot be redirected to pay the deceased debts, but the beneficiaries debts are not exempt.

Other Things to Think About Regarding Creditors and Life Insurance Proceeds

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If the deceased had set up a policy to pay off the mortgage on their home, the spouse, if named as beneficiary, does not have to definitely use the proceeds to pay off the house.

The only way a specific debt can be paid, at the time of death, is if the creditor is named as the beneficiary, or the will specifically directs the proceeds to pay a specific bill.

If the benefactor lists a specific beneficiary and in his/her will states that the life insurance proceeds are to be used to pay for a specific debt, you must pay the debt with the proceeds. Make sure that the will is a legally binding one.

The named beneficiary of a life insurance policy will receive the proceeds upon the death of the benefactor.

The proceeds are even protected from the IRS.

If the deceased owed back taxes, the IRS cannot go after proceeds of a life insurance policy with a named beneficiary. If the deceased’s estate is the beneficiary, the IRS can take the money it is owed.

This is also the case for when no beneficiary is named, or the named beneficiary is deceased and there are no remaining children or a spouse.

Life Insurance Trust

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If you set up a life insurance trust, and name the trust as the beneficiary, your creditors will not have access to the death proceeds.

If you want to have the proceeds go to a trust and then have the trustee distribute the proceeds and other assets at the time of your death, creditors cannot touch the assets.

This might be a good way to pass proceeds along, for systematic distribution to a child, or for the care of a disabled person, rather than having all the proceeds paid out at once.

So, for the majority of cases, debt collectors are prevented from seizing life insurance proceeds payable to a beneficiary.

The only way debt collectors can access the money is if the proceeds are paid to the deceased’s estate. Creditors can go after the estate for payment.

Debt collectors who have knowledge that the beneficiary, with unsatisfied debts, can go after them for payment, but they have no direct tie to the life insurance proceeds.

The beneficiary of life insurance policies is protected from debt collectors of the deceased, including the IRS.

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