Spendthrift Clause

A spendthrift clause in a life insurance settlement:

1. A.Waives premiumsWaiving premiums is the job of a disability-related rider on the policy itself. This clause operates after death, governing how proceeds already payable are protected.
2. B.Protects installment proceeds from the beneficiary's creditorsCorrect - it shields structured payouts from creditors.
3. C.Lets the beneficiary spend freely with no limitsThis reverses the clause. Its purpose is to restrain access, keeping the funds beyond the reach of creditors and beyond the beneficiary's power to assign them away.
4. D.Increases the death benefitThe clause adds no money. It affects how securely the proceeds reach the beneficiary, not how much is paid out.

Why: The spendthrift clause protects installment proceeds from the beneficiary's creditors.

Delphine's $500,000 death benefit will be paid to her son Rafael under an installment settlement option, and the policy includes a SPENDTHRIFT clause. The practical effect of that clause is that:

1. A.Rafael may accelerate the remaining installments into a lump sum at any time without the insurer's consentThis is the opposite of the clause's effect. Spendthrift provisions remove the right to commute.
2. B.The insurer may withhold payments if it concludes Rafael is managing the money poorlyThe clause restricts assignment, not the beneficiary's spending. The insurer has no supervisory role.
3. C.The proceeds are shielded from claims of Delphine's own creditors and from federal estate taxThe clause addresses the beneficiary's creditors. Estate tax turns on incidents of ownership, not on this clause.
4. D.Rafael cannot assign or borrow against the undistributed proceeds, and his creditors generally cannot reach them while the insurer holds themCorrect. Restricting the beneficiary's control is precisely what puts the funds beyond his creditors' reach.

Why: A spendthrift clause bars the beneficiary from assigning, commuting or encumbering proceeds still held by the insurer, and correspondingly puts those proceeds beyond the reach of the beneficiary's creditors. It works only where the proceeds remain with the insurer under a deferred settlement option; a lump sum handed over is fully exposed. The clue is that the money is being paid in installments rather than at once.

Marcus receives his father's 600,000-dollar death benefit under a 15-year installment settlement option containing a spendthrift clause. Three years in, he signs an agreement selling the remaining installments to a funding company for a discounted lump sum. Is the assignment effective?

1. A.No. A valid spendthrift clause bars the payee from assigning, commuting or encumbering installments before the insurer pays them, so the insurer continues paying Marcus on scheduleCorrect. The restraint on alienation is the operative feature of the clause.
2. B.Yes. Once the insured dies the proceeds belong to the beneficiary absolutely, and any owner of property may sell itThis is exactly the result the clause was written to prevent. The beneficiary's right is to receive installments as they fall due, not to a lump sum he can sell.
3. C.Yes, because a spendthrift clause protects only against the beneficiary's creditors and never against the beneficiary's own voluntary transfersA settlement-option spendthrift clause restrains voluntary assignment as well as involuntary attachment. Protecting against creditors alone would be easy to defeat.
4. D.No, but only because the insurer must consent to any assignment; with the insurer's consent the sale would be validThis misidentifies the barrier. The clause itself, placed there by the policyowner, is what blocks the transfer.

Why: A spendthrift clause in a settlement option bars the payee from assigning, commuting, anticipating or encumbering installments before the insurer actually pays them. That restraint runs against the payee's own voluntary transfers as well as against his creditors, which is the whole point: the insured wanted the money paid out over time and not converted to cash. So the insurer keeps paying Marcus on the original schedule. The clue is that the proceeds are still in the insurer's hands under the option.

Life insurance proceeds are held by the insurer under an installment settlement option for a beneficiary with serious debt problems. A SPENDTHRIFT clause in the settlement:

1. A.Erases the beneficiary's existing debtsWrong. Debts survive; only the proceeds' attachability changes.
2. B.Lets the beneficiary pledge future payments for a loanWrong. Blocking such assignments is precisely the clause's function.
3. C.Protects the retained proceeds from the beneficiary's creditors until payments are madeCorrect. Insurer-held installments are beyond the creditors' reach.
4. D.Protects funds even after the beneficiary deposits them in her bankWrong-but-tempting. Distribution ends spendthrift protection.

Why: Spendthrift clauses prevent creditors of the beneficiary from attaching proceeds retained by the insurer under settlement options and bar the beneficiary from anticipating or assigning the payments; once funds are distributed, protection ends. Citation: spendthrift clause doctrine in settlement options. Takeaway: protection lives while the insurer holds the money.