Texas General Lines — Life, Accident, Health and HMOLife InsuranceEasy
A life insurance policyowner is concerned about protecting their policy's cash value from creditors and ensuring it passes directly to their beneficiary without going through probate. Which policy feature or arrangement best addresses these concerns?
- ADividend Options
- BSpendthrift Clause
- CPolicy Loan Provision
- DAutomatic Premium Loan
Show answer & explanationAnswer & explanation
Correct answer: B. Spendthrift Clause
A spendthrift clause is specifically designed to protect policy proceeds from the claims of creditors of the beneficiary and prevents the beneficiary from assigning or encumbering the proceeds before receiving them, thus also bypassing probate for those specific funds.
Why the other options are wrong
- A. Dividend options determine how policy dividends are used, unrelated to creditor protection or probate avoidance.
- C. A policy loan provision allows the owner to borrow against the cash value, but doesn't shield it from creditors or probate for the beneficiary.
- D. Automatic Premium Loan uses cash value to pay overdue premiums, not protect from creditors.
Spendthrift Clause
A provision in a life insurance policy that protects the proceeds from the claims of the beneficiary's creditors and prevents the beneficiary from assigning or encumbering the proceeds.
- Protects policy proceeds from beneficiary's creditors.
- Prevents beneficiary from assigning or transferring rights to proceeds.
- Ensures funds are paid directly to the beneficiary as intended.
Memory trick: Spendthrifts Guarded By Clause