can the owner of a whole life policy be sued by a creditor?

UPDATED: Dec 19, 2016

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UPDATED: Dec 19, 2016Fact Checked

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Asked December 19, 2016

1 Answer

Bankruptcies are filed in federal court, but creditors seek legal remedy for debt collection in state courts when this is not an issue. This is just one complication having to do with collection and life insurance, but it is an important distinction when seeking the answer to this question. The laws covering life insurance policies vary between the federal government and state governments, and the law will be applied according to the court system where the suit is filed.

While creditors have the ability to file a lawsuit against a person who has not paid them, not all of their assets are liable to collections. Life insurance policies cover a specific person, but they may be owned by either that person or another. The beneficiary might be a third person, but some of them are owners of life insurance policies such as a spouse. Because of these complications, there are many different laws covering them.

In general, federal law protects the cash value of a life insurance policy from claims, but it is only applied in states that do not have laws overriding or negating federal law. As long as the policy owner is sued in a state that complies with federal law in this matter, a creditor should not be able to access any of the cash value of the life insurance policy.

There are many different states that do not exempt the cash value of a life insurance policy from creditors, and there are wide variations in these laws. Some of them cover only policies for spouses, and others cover policies for only a specified total amount. There are states that offer no protection, and other states cover only a small amount if it is paid out over several years.

Answered December 19, 2016 by larson82

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