Texas General Lines — Life, Accident, Health and HMOTexas Statutes and Rules Specific to Life InsuranceMedium
A Texas life insurance policy includes a 'Spendthrift Clause.' The beneficiary of this policy is facing severe financial difficulties and has several creditors attempting to claim the death benefit. What is the primary purpose of the Spendthrift Clause in this situation?
- ATo protect the death benefit from the beneficiary's creditors and prevent assignment.
- BTo ensure the death benefit is paid directly to the beneficiary's legal counsel.
- CTo convert the lump-sum death benefit into an annuity for the beneficiary.
- DTo allow the insurer to delay payment until the beneficiary's financial situation improves.
Show answer & explanationAnswer & explanation
Correct answer: A. To protect the death benefit from the beneficiary's creditors and prevent assignment.
A Spendthrift Clause is designed to protect the death benefit from the claims of the beneficiary's creditors. It prevents the beneficiary from assigning or encumbering the policy proceeds, ensuring the funds are distributed directly to them, free from external claims.
Why the other options are wrong
- B. Payment is made to the beneficiary, not their counsel, unless specifically directed by the beneficiary.
- C. While settlement options exist, the Spendthrift Clause itself does not mandate conversion to an annuity.
- D. The clause does not allow the insurer to delay payment based on the beneficiary's financial status.
Spendthrift Clause (Life Insurance)
A provision in a life insurance policy that protects the death benefit proceeds from claims by the beneficiary's creditors and prevents the beneficiary from assigning or encumbering the proceeds.
- Protects against creditor claims.
- Prevents assignment by beneficiary.
- Ensures proceeds reach the intended beneficiary.
- Often used when payment is made in installments.
Memory trick: Spendthrift: Protects the purse from the thirst of others.