Life Insurance Proceeds and Creditor Claims

Are life insurance proceeds subject to the claims of the decedent’s creditors under Tennessee law? Consider two scenarios.

In the first scenario, the proceeds are payable directly to the decedent’s spouse or children, bypassing probate. Not surprisingly, Tennessee law states that the decedent’s creditors cannot reach the proceeds:

The net amount payable under any policy of life insurance or under any annuity contract upon the life of any person made for the benefit of, or assigned to, the spouse and/or children, or dependent relatives of the persons, shall be exempt from all claims of the creditors of the person arising out of or based upon any obligation created after January 1, 1932, whether or not the right to change the named beneficiary is reserved by or permitted to that person.

Note that distributions from annuities are also protected under this statute.

But what if the insurance proceeds are payable to the decedent’s estate? Logically, it would seem that the proceeds, being assets of the probate estate, should be available to satisfy creditor claims. Not so fast:

On the death of an insured, any life insurance acquired by the insured or the insured’s spouse and payable to the intestate insured’s estate benefits the surviving spouse and children and the proceeds shall be divided between them according to the statutes of distribution without being in any manner subject to the debts of the decedent.

The same rule applies to testate estates and revocable trusts:

If the proceeds of the insurance are payable to the estate of a testate decedent or the trustee of a revocable trust of which the decedent was a settlor, the proceeds shall pass as part of the estate or trust and under the dispositive provisions of the will or trust agreement, as ordinary cash, whether or not the will or trust agreement uses any apt or express words referring to the insurance proceeds, but the proceeds shall not be subject to the debts of the decedent unless specifically charged with the debts in the will or trust agreement.

Accordingly, life insurance proceeds are exempt from the decedent’s creditors, regardless of whether payable directly to the family or to the decedent’s estate.

Source: T.C.A. §§ 56-7-203 and 56-7-201

Posted by Joel D. Roettger, JD, LLM, EPLS

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