How to Protect Life Insurance Proceeds from Creditors

By Daniel A. Perry, Esq.

I was speaking with a client recently as part of their comprehensive estate and wealth planning and they asked if their life insurance proceeds would be protected from creditors in the event of their death.

This is a very common question and the answer depends almost entirely upon state law. In Ohio, the Revised Code has a 100% exemption for life insurance, meaning that 100% of life insurance proceeds are protected from creditors.

Does this mean that you can never lose life insurance to a creditor? The answer is both yes and no.

Let’s look at the following example. John passes away following a short illness. He owns a $1 million life insurance policy with his son, James, as the sole beneficiary. John has a credit card with a $50,000 balance at the time of his death. Can John’s creditor seek repayment of the $50,000 from the $1 million life insurance proceeds?

The quick answer is no. John’s creditor can only seek to collect from John’s estate and only subject to the priority of creditors.

However, what if James is subject to a lawsuit and the judgment creditor obtains a $500,000 judgment? Can the judgment creditor seek to collect from the $1 million death benefit? The quick answer is still no. The longer answer is that the judgment creditor will still try — likely without James’ knowledge.

A common scenario is that James deposits the $1 million life insurance proceeds into an account. The judgment creditor seeks to garnish the bank account to satisfy the $500,000 judgment. James, thinking he has no choice, pays the $500,000 judgment with the money in this account.

However, James would not have been required to pay this amount with the correct legal advice. As stated above, life insurance proceeds are 100% exempt from creditors — subject to limited exceptions. When a bank account is garnished, the debtor has the right to a hearing on the creditor’s right to garnish and attach the bank account. The hearing is limited to whether the assets are subject to an exemption. Requesting a hearing, with the proper legal documentation, would prevent the creditor from seizing the bank account with the life insurance proceeds.

For more information

Life insurance proceeds are one of the special type of assets which are protected from creditors under Ohio law. If you have questions about asset protection and wealth planning, please call us at (513) 241-0400 or use our contact form to schedule a time to discuss how we can help you and your family.

The attorneys at Aronoff, Rosen & Hunt, LPA are here to help you!