Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceMedium
An insured individual has a life insurance policy with a spendthrift clause. Their primary beneficiary is known to have financial difficulties and a history of poor spending habits. What is the primary purpose of this clause in this scenario?
- ATo allow the beneficiary to assign their rights to the death benefit to a creditor.
- BTo permit the insured to change beneficiaries without the current beneficiary's consent.
- CTo ensure the death benefit is paid out as a lump sum immediately upon the insured's death.
- DTo prevent the beneficiary's creditors from claiming the death benefit proceeds.
Show answer & explanationAnswer & explanation
Correct answer: D. To prevent the beneficiary's creditors from claiming the death benefit proceeds.
A spendthrift clause is a provision in a life insurance policy that protects the death benefit proceeds from the claims of the beneficiary's creditors. It also prevents the beneficiary from assigning or encumbering the proceeds, ensuring the money is used for their support.
Why the other options are wrong
- A. This is the opposite of what a spendthrift clause does; it prevents assignment to creditors.
- B. Beneficiary changes are governed by other policy provisions, not the spendthrift clause.
- C. The spendthrift clause deals with protection from creditors, not the method or timing of payout.
Spendthrift Clause
A provision in a life insurance policy that protects the death benefit proceeds from the claims of the beneficiary's creditors and prevents the beneficiary from assigning or encumbering the proceeds.
- Protects proceeds from creditors
- Prevents beneficiary from assigning funds
- Ensures funds are used for beneficiary's support
Memory trick: Shield the spendthrift's stash.