Life & Health Insurance Exam (National Portion)Policy Provisions, Options, and RidersHard
A life insurance policy includes a 'Spendthrift Clause'. What is the primary purpose of this clause?
- ATo protect the policy's proceeds from the beneficiary's creditors.
- BTo limit the amount of money the beneficiary can spend per month.
- CTo prevent the beneficiary from changing the settlement option once chosen.
- DTo ensure the policyowner cannot make withdrawals from the cash value.
Show answer & explanationAnswer & explanation
Correct answer: A. To protect the policy's proceeds from the beneficiary's creditors.
The Spendthrift Clause is designed to protect the death benefit proceeds from the claims of the beneficiary's creditors, as well as preventing the beneficiary from assigning or commuting the proceeds. This ensures the funds are used as intended by the policyowner.
Why the other options are wrong
- B. It doesn't directly limit monthly spending but rather controls access to the principal by creditors or the beneficiary's own poor financial decisions.
- C. While settlement options can be restricted, the primary purpose of this clause is creditor protection.
- D. This clause relates to the beneficiary's access to proceeds, not the policyowner's access to cash value.
Spendthrift Clause
A life insurance policy provision that protects the death benefit proceeds from the claims of the beneficiary's creditors and prevents the beneficiary from assigning, pledging, or commuting the proceeds before they are actually received.
- Protects proceeds from beneficiary's creditors.
- Prevents beneficiary from assigning or selling future payments.
- Ensures the policy's purpose of providing for the beneficiary.
- Only applies to proceeds held by the insurer under a settlement option.
Memory trick: SPENDTHRIFT: Shielding Payouts, Ensuring No Debt.