Question

Genny is meeting with her insurance advisor to purchase a life policy. She asks her advisor if there is any way to ensure the policy would not be subject to her creditors. The advisor recommends that if she names her daughter in the policy then it is likely to be protected from seizure. Which of the following best describes why the advisor's advice is correct?

a. Because her daughter is considered a contingent beneficiary.
b. Because the policy is effectively held in trust for her daughter.
c. Because her daughter is considered an irrevocable beneficiary.
d. Because her daughter is considered a family class beneficiary.

Answer 1

The advisor is correct in suggesting that naming Genny's daughter as a beneficiary could protect the life insurance policy from creditors because the policy would be effectively held in trust for her daughter.

Step-by-step explanation:

The advisor's recommendation to Genny is best described by option b, because naming her daughter as the beneficiary means that the policy is effectively held in trust for her daughter. If Genny's life insurance policy names her daughter as the beneficiary, it generally creates a separation between her estate and the policy proceeds. This separation means that the proceeds may not be available to Genny's creditors upon her death. Life insurance policies that name beneficiaries can often offer protections against creditors for the proceeds of the policy, as the money is intended to go directly to the beneficiaries without forming part of the estate that could be subjected to creditor claims.

However, the level of protection from creditors can vary depending on the laws of the state where Genny lives. In some cases, naming a child as an irrevocable beneficiary instead of a revocable one may offer greater protection, since Genny would not have the power to change the beneficiary without the consent of the named beneficiary. This information is essential for anyone looking to protect their policy from potential creditor claims.