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Dealing with debt as part of life, retirement, and estate planning isn’t always easy. Though many financial experts recommend taking on as little debt as possible later in life, this isn’t always an option.

Debt can lead to tricky situations that can’t always be easily resolved, and this often leaves people asking an important question: can creditors take their life insurance proceeds?

The answer isn’t a definite yes, but in most cases, many retirees can rest assured knowing that life insurance proceeds are exempt from creditors. However, there are exceptions to this, and it is worth knowing about them to ensure that your assets will be protected.

This short guide from Symmetry Financial Group outlines the basics of life insurance policies and how individuals can ensure that assets reach their intended beneficiaries. 

Why beneficiary designations are so important

When people enroll in a life insurance policy, it is critical that they name at least one beneficiary. A beneficiary can be an organization or an individual who gets their death benefits in the event that they die while the policy is enforced. The insured individual can name multiple individuals and groups who will receive their death benefits and must also indicate whether or not they want all beneficiaries to get the same percentage of the death benefit in the event of a payout.

The insurer must pay out proceeds to the named beneficiaries, and the beneficiaries own them upon the insured’s death. This means that these assets do not go through probate court, and that creditors do not have access to them in most cases.

What happens when the estate is the named beneficiary

If someone does not name a beneficiary, the life insurance policy will be made payable to their estate. Unlike beneficiaries, which cannot be held responsible for debts, estates can be. This means that when someone names their estate as their beneficiary, valid debts can be collected based on select protections and state laws. This is sometimes done deliberately in order to make sure that the estate does pay off any necessary debts.

What happens when the beneficiary is a spouse

Life insurance proceeds are not exempt if they are payable to spouses or other individuals with whom the beneficiary shared financial obligations. The amounts owed and what debts are eligible to be collected are again subject to state laws. Assets such as mortgage loans, personal loans, and credit cards, to name a few financial obligations, may be paid out through life insurance benefits.

A beneficiary’s creditors can collect life insurance proceeds

Though life insurance policy proceeds may exempt the beneficiaries from the policyholder’s creditors, debts, and obligations to some capacity, they can be collected by the beneficiary’s creditors. This is because when a life insurance policy is paid out, the proceeds contractually become the property of the beneficiaries.

As soon as this happens, if the beneficiary owes money to anyone, creditors are able to collect the life insurance proceeds to satisfy these debts so long as there isn’t an exception, which typically only happens under state law.

How life insurance empowers individuals to create lasting, meaningful financial legacies

Many people purchase life insurance in order to provide for and protect their families in the event of their death. This can prove to be helpful, especially if they have extensive debts, as creditors typically cannot collect from this money.

However, there are many exceptions, and it is worth making time to talk to an insurance agent and an estate planning specialist to best determine how to protect your family for decades to come. Symmetry Financial Group, for example, can provide you with a free quote and help to build a plan that uses life insurance to help you achieve your long-term financial goals.