Wednesday, June 15, 2022

Can Debtors Take Life Insurance Money

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If Theres A Named Beneficiary Is There Still A Risk

At What Point Can You Take Money Out of Your Whole Life Insurance Policy Without it Being a Loan?

There is risk of and eating up all of the proceeds before they are paid out to heirs is minimized when theres a named beneficiary, but its possible that it can still happen in unique situations. Since life insurance proceeds are protected, its very unusual that someone listed on the policy. Heres some scenarios that you should be aware of:

  • The Decedent and Beneficiary Have Joint Debt- If the deceased was a co-signor on a loan with a beneficiary, the situation gets a bit hairy. In most states, the creditor can terminate the loan and collect on the debt by claiming against the insurance money. The purpose of this is to repay the loan because the co-signor is no longer living.
  • Back Taxes through the IRS- Some things in life are certain and taxes are one of those things. If the benefactor had tax obligations with the IRS, its understandable that you might worry that the IRS would seize the death benefit. Luckily, if the deceased is the one who owed the money, that wont happen. The IRS can go after assets in the estate but not proceeds named to someone.

You can pay these debts with the proceeds, but youre not obligated to do so. If, however, you have liens because of your own back taxes, the IRS could learn that youve come into money and take that money to cover your obligations.

When The Estate Of The Deceased Is Named As The Life Insurance Beneficiary

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.

Can Life Insurance Proceeds Be Taken By Creditors

Key Takeaways:

  • In most cases, life insurance proceeds are exempt from creditors
  • Proceeds may not be exempt if your spouse is your beneficiary and you co-signed certain types of loans
  • Once your beneficiary receives your life insurance death benefit, those funds could be claimed by creditors seeking money they owe

If you have debt, you may be wondering whether creditors could claim your life insurance proceeds after you die. In most cases, life insurance proceeds will pass exempt from the insured person’s creditors, but there are a couple of exceptions.

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Whole Life Cash Value Vs Face Value

Life insurance policies are meant to help your loved ones if tragedy strikes. What you may not realize is that life insurance can also help your creditors. If you’re being sued for debts or if you file bankruptcy, your creditors might try to get hold of your life insurance holdings. If you’re concerned, you should find out if your life insurance policy is protected from creditors and if any of these protections have limitations.

Debts May Still Have To Be Paid Somehow

Can a debt collector take life insurance money?

Just because life insurance proceeds avoid probate doesnât mean the money wonât eventually be needed to settled debts.

If there is a co-signor on any loan and that person is still alive, he or she now owns the debt and must repay it.

For example, if you co-own your home with a spouse, he or she must continue paying the mortgage after your death. With a sufficient life insurance death benefit, the spouse can either pay off the full mortgage or continue making monthly payments.

In community property states, all assets and liabilities acquired during a marriage are considered to be owned by both spouses, even if the spouse did not co-own, co-sign, or hold joint account status. This essentially means that in these states, joint ownership is automatically presumed by law.

Your surviving spouse is liable for all debts that occurred during the marriage in community property states, which are:

  • Arizona.

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What Happens To Mortgage Debt

If you and someone else such as a spouse or partner took out a mortgage together, what happens to that debt is straightforward.

The surviving borrower is responsible for the loan, says Leslie H. Tayne, a New York debt settlement attorney. If you dont want to leave the co-signer on the hook for the remaining balance, a life insurance policy can help cover the cost. So factor in how much is owed on your mortgage when calculating how much life insurance you need.

If there is no co-signer on the mortgage, no one has to take on the obligation. However, that doesnt mean your family can inherit the property free and clear. If they want to keep the home, they will have to assume responsibility for the loan, Tayne says.

Even if they want to sell it, they will need to continue making mortgage payments until the house is sold. And the remaining mortgage debt will have to be paid off once the house is sold.

If no one takes over the mortgage after you die, the bank can foreclose on the property, Tayne says. It can then sell it to recover the amount owed on the mortgage.

Exempting Cash Value In A Life Insurance Policy

Depending on where you live, you can protect certain property by using either federal or state exemptions. Exemptions let you take certain property and protect it from the trustee and your creditors. Your state law will determine what your exemptions are, or if you should use federal exemptions. Many states have an exemption specifically for life insurance that would cover the cash value of a life insurance policy. Some states limit it to policies where the beneficiary is the spouse or a dependent of the debtor.

If you dont have a life insurance exemption available, you may be able to use a wildcard exemption to protect the cash value. A wildcard can be used to exempt any property and varies by state, or federal law. The wildcard can be used with another exemption if the life insurance exemption is not enough to protect the cash value.

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When Can You Use A Life Insurance Payout To Pay Debt

Although it isnt compulsory, you can use your life insurance payout to pay outstanding debt if you wish to. If you want to have this done in the event of your death, you need to provide for it in your estate planning. You can update your Will to give your executor the authority to use your life insurance policy payouts to cover certain types of debts.

Paying off your home mortgage can be a good strategy if youre leaving your house to your spouse or other financial dependents without fear of them needing to liquidate the asset to meet your debts. In this way, life insurance can be an excellent tool for your estate planning strategy, allowing you to provide extra security to your beneficiaries.

Naming A Beneficiary Who Is Under Legal Age

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If the beneficiary you name is under the legal age when you die, you may want to set up a trust and designate a trustee or administrator. This person can hold the proceeds of the death benefit in trust on behalf of the minor.

If you don’t name a trustee or administrator, the death benefit, plus any interest it earns, will be held in trust by the province or territory. It will be paid out when your beneficiary reaches legal age. Consult with a lawyer or financial advisor for more details.

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When Life Insurance Is Part Of An Estate

A life insurance policy has one or more designated beneficiaries if the decedent completed a beneficiary designation form for the policy before their death. If at least one of the designated beneficiaries survives the decedent, the life insurance proceeds pass directly to the beneficiary outside of probate.

This is a critical distinction because the probate process deals with the decedent’s creditors and pays their debts with available estate funds. When the insurance proceeds go directly to a beneficiary, bypassing the estate, the money belongs to the beneficiary. Friends, relatives, and insurance beneficiaries are not responsible for paying any debts the decedent left behind, so the money is out of the reach of their creditors. The life insurance proceeds don’t have to be used to pay the decedent’s final bills.

But there’s a catch. People sometimes name their estates as beneficiaries of their insurance policies, possibly intending that the policy should do just thatpay off their final bills. This sends the money directly into the estate’s coffers. In this case, it could and would be used to pay their bills.

Can A Debt Collector Take Life Insurance Money

  • In most cases, the beneficiary of a life insurance policy is not liable for the benefactors 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.

The courts, or an executor distribute assets from the deceaseds 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.

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!

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Exemption Of Child Support Payments From Garnishment

Some clients want to know if child support payments are exempt from garnishment.

For example, suppose a mother receives child support payments from her ex-spouse. The mother does not work and does not have any separate income. The mother uses some of the child support payments to support the children that live with her. The mother saves the remaining amount of child support payments in her personal bank account.

The mother has a monetary judgment against her. Can the judgment creditor garnish the funds in the bank account?

In that situation, the funds are likely exempt. The head of household exemption exempts money earned from someone who is head of the family. The exemption applies to funds held in a bank account for up to six months.

In the above example, the money was earned by the head of household, who is the ex-spouse and was subsequently deposited into a bank account. Even though the mother is not the wage-earner, she can still probably claim that the funds are exempt. Further, this result matches the purpose of the law, which is to not leave the family, and in this case the children, destitute and reliant on the state.

First What Is Life Insurance

Family Horizons Credit Union  10 Money

Life insurance is a lump sum of money paid upon someones death to a designated beneficiary. In order to get this life insurance, the insured person pays a premium to a life insurance company this money is typically paid monthly, or sometimes yearly. A life insurance policy is the contract between a person and a life insurance company and states the terms of the agreement. The contract includes the amount of the lump-sum payment, the amount of the monthly premium, the beneficiary , the contract length, etc.

In my case, I was able to get a life insurance policy with my employer . I paid $11 every paycheck to get a life insurance policy of $140,000 to be paid upon my death. I made my co-signer/co-borrower, my mom, the beneficiary. With this money, she would be able to pay off all of my student loans, and have some money left over.

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Life Insurance Protection From Bankruptcy And Creditors

There are multiple people and entities involved in a life insurance policy. Theres the insurance company that pays out death benefits and other proceeds, theres the owner of the policy, the person who is insured, and beneficiaries. And sometimes there are creditors who may attempt to make a claim on the policys cash value if the policyowner is a debtor.

If youre in bankruptcy and own a life insurance policy and the insured is yourself, your spouse, or someone youre financially dependent on, there are protection laws in place. When filing for bankruptcy, you can choose between either the federal or state law exemptions. The federal Bankruptcy Code protects the insurance element of your unmatured life insurance policy, and up to a specified amount of interest in any accrued dividends, interest, or loan values.

In addition to protecting the insurance element of a policy from bankruptcy, many state laws also protect the cash value and death benefit from creditors outside of a bankruptcy situation.

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Can Creditors Take My Life Insurance After My Husband Died

Q. My husband died with no assets except a 24-year-old high mileage car. I just got a life insurance beneficiary check for $10,000. If I deposit the check into my bank account, can the New Jersey courts take the funds for an outstanding judgement against me? I was hospitalized in October 2018 and with my husband so ill, I could not pay one of the hospital bills not covered by insurance. This life insurance money is all that I have to live on. How can I protect it?


A. Were sorry to hear about your husband.

These are tough times for so many people and we understand why you want to protect the funds.

Contact the original creditor who has the judgment against you, said Karra Kingston, a bankruptcy attorney in Union City.

Ask them if they would provide a letter of satisfaction or how you can work with them directly, she said.

If the creditor wont drop the debt, a payment plan that you can afford would be the next goal.

If they have closed or you cannot find their information, then you may need to go to court and try to reopen the case to remove the judgment, Kingston said.

This can be time consuming all the more during the coronavirus pandemic, when courts are only addressing emergent matters.

Email your questions to .

Karin Price Mueller writes the Bamboozledcolumn for NJ Advance Media and is the founder of Follow NJMoneyHelp on Twitter Find Sign up for NJMoneyHelp.coms weekly e-newsletter.

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Can The Bankruptcy Court Take Life Insurance Funds In Ohio

When you file bankruptcy, all of your property becomes property of the bankruptcy estate. This includes life insurance policies that you own, and money that you receive as a beneficiary under someones life insurance policy. The type of case you file, the type of insurance policy and when life insurance money is received are all important in determining if the court can take life insurance funds.

Can Both Spouses Claim Head Of Household Exemption

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When two spouses are named as debtors in the same judgment only one of the spouses can be head-of-household. The joint debtors cannot argue that they each support a separate child or parent.

Whenever two spouses each earn money it is possible that neither of them can be head of household. If the spouses have children, the higher earning spouse is probably head of household. But, if the two earning spouses do not have children neither will qualify to claim the head of household exemption from wage garnishment. In that case, it is not enough that the debtor spouse earns more than the non-debtor spouse.

The debtor claiming the exemption must be the dependent spouses primary source of support when looking at the dependents income from all sources. Courts will also consider non-financial factors, including which spouse oversees financial decisions.

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Life Insurance Proceeds Are Not Exempt From The Beneficiaries’ Creditors

Finally, even though life insurance policy proceeds may be exempt from being used to pay your creditors when you die, that doesn’t mean they are exempt from the reach of your beneficiaries’ creditors. When you pass away, your policy proceeds contractually become the assets of the beneficiaries you designated.

As soon as your beneficiaries have a right to receive those proceeds, they are fair game for anyone to whom they owe money unless an exception applies in your state.

Will Debt Be Taken Out Of Life Insurance When A Parent Dies

Few events in life have the emotional and financial impact of a parent’s death. An adult son or daughter may be called on to make funeral arrangements and settle their parent’s financial affairs. The details of life insurance coverage determine whether a parent’s creditors can make a claim against the proceeds from their life insurance policy.

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