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A creditor holding a court judgment against a debtor may enforce that judgment by attaching (seizing) assets in accordance with the laws of your state. Some assets, however, are exempt from collection. This includes, in most states, the death benefit of a life insurance policy, up to a limited amount. If you are an insurance beneficiary, state law (or federal law, in case you've filed for bankruptcy) may protect any death benefits to which you are entitled.
Creditor Judgments and Bankruptcy
If you are subject to a court judgment, a creditor has the right to seize non-exempt assets. You may be able to claim an exemption for death benefits, depending on your state's schedule of exempt assets. If you are in bankruptcy, you may have a choice to use either state or federal exemptions. In some states, you are required to use the state law exemptions. You can select the federal exemptions in Alaska, Arkansas, Connecticut, the District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington and Wisconsin.
State Law Exemptions
Death benefits may be wholly or partially exempt from attachment. The exemption may depend on the relationship of the beneficiary to the deceased. In Arizona, for example, up to $20,000 of a death benefit is exempt, as long as the beneficiary is a surviving spouse or child. In California, death benefit proceeds are exempt "to the extent necessary for the support of the judgment debtor, and spouse and dependents." This amount would be subject to a calculation by the court based on the debtor's income and assets.
Some states do not protect death benefits, but do protect the cash value of life insurance policies under certain circumstances. In Florida, for example, there is no protection for death benefits, no matter who the beneficiary is. If the debtor is also the insured, then any cash value in a life insurance policy he owns is protected from judgments. However, if you buy a life insurance policy on the life of someone else, the cash value is not exempt.
Under federal bankruptcy law, death benefit proceeds are exempt if the policy insured an individual for whom the debtor was a dependent. The amount of the exemption is limited to the "extent reasonably necessary for the support of the debtor and any dependent of the debtor." Death benefits paid by Social Security are also protected in full from creditor attachment. The only exception to this rule would be for child support orders and federal tax debts. Veterans' benefits are also protected.
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