creditor claims against an estate

Creditors’ Claims Against Life Insurance Proceeds in Illinois

Article written by Illinois & Iowa Attorney Kevin O'Flaherty
Updated on
February 5, 2020

In this article we will ask the questions: “Can creditors claim life insurance proceeds in Illinois?, “Who are life insurance beneficiaries?”, and “Are there exemptions that would allow creditors to reach life insurance proceeds paid out to beneficiaries?”

Can Creditors claim life insurance proceeds in Illinois?

If you or a loved one have debts, you may be wondering if the proceeds from a life insurance policy would be used to pay those debts after death. The good news is that in Illinois, generally, the creditors of the deceased person have no rights against the money paid out by a life insurance policy to the beneficiaries. However, if any proceeds are paid out to the estate, that money may be used to pay off claims, similar to any other asset in the estate. 

Who or what are life insurance beneficiaries?

Life insurance policy beneficiaries can be anyone from your wife and/or children, to your estate or even a non-family member entity. In most cases, a beneficiary is a family member and likely a child or grandchild. The important thing to remember is that the beneficiary is who will be receiving the insurance proceed. And, as mentioned before in regards to the estate being the beneficiary, your choice can have an effect on a creditors claim to the insurance proceeds. Most policies also ask to have a contingent beneficiary named in the even that your first-named beneficiaries do not survive you, OR disclaim your insurance proceeds.

Exemptions that may allow creditors to claim insurance proceeds.

For the most, if the buyer of a life insurance policy does their due diligence when purchasing a policy, the life insurance payouts are straight forward, but below are a few situations when creditors may claim insurance benefits:

  • If the proceeds are paid out to the decedent’s estate they will most definitely be accessible to creditors. Why would someone purposefully name their estate as the beneficiary of a life insurance policy? Well, it could be multiple reasons, but for the sake of this article, the decedent may want the money from his or her policy to pay off any remaining debt. 
  • Another important note here is that if the life insurance policy premiums are paid “in fraud of creditors,” think that if you were to dump a bunch of money from your checking account into a life insurance policy in order to avoid paying debt, and this can be proven, then the life insurance policy will still be exempt from probate, but possibly be claimed by creditors after passing to the beneficiaries.
  • First-named beneficiary dies with no contingent beneficiary named. In this situation the proceeds would pass to the estate and into probate, making them available to creditors.
  • Against a beneficiaries’ debt. Even though the proceeds themselves still avoid probate, once the proceeds are in the hands of the beneficiary they can be claimed by a creditor. For example: if your wife is the beneficiary of the policy, once the money is paid out to her the creditors could file a claim against her newfound funds. The same goes for a child, grandchild, etc. Once the money is paid out, it is just money.

All this means that it is important to have your assets organized into the proper vehicle upon death, usually a living trust. For more information on living trusts and naming a beneficiary check out Illinois Revocable Living Trusts Explained and Should My Trustee Be the Beneficiary of My Life Insurance Policy?

Additional Financial Considerations
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From Financial Experts

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