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Life Insurance Policy Proceeds: How Tennessee Law Protects Those Proceeds for Surviving Children and Spouses

There are Tennessee statutes which protect the proceeds of life insurance policies for surviving spouses and children even when the deceased parent may have owed creditors more money than the policy benefits at the time of his or her death.  Not only do the statutes protect the proceeds of life insurance policies, but also, they protect the cash value of life insurance policies and annuities while the parent is alive.

The two statutes which provide protection to surviving spouses and children are T.C.A. §56-7-201 and §56-7-203. Here are some examples of how they work.

Assume that, at Dad’s death, he had a $100,000 life insurance policy in effect, but had named no beneficiary for whatever reason.  At Dad’s death, he has lots of debt.  Will Dad’s creditors be able to collect from the proceeds of his life insurance policy?  After all, he did not designate a beneficiary?  The answer is “no.”

If Dad did not name a beneficiary, the life insurance proceeds will be payable to his estate. Under T.C.A. §56-7-201, whether Dad died with a Will (testate) or without a Will (intestate), the proceeds will not be subject to the claims of creditors if Dad died with a surviving spouse and children or either.  Under that statute, if Dad died without a Will, the life insurance proceeds must be distributed to his surviving spouse and children according to the statutes that delineate how assets are to be distributed when someone dies without a Will.

Under T.C.A. §56-7-201, if Dad died with a Will or a Revocable Trust, the life insurance proceeds will be distributed according to the provisions of his Will or Trust as if they were cash.  Even if Dad’s Will or Trust does not mention the life insurance policy proceeds, those proceeds are distributed according to how Dad wanted his cash distributed.  So, if Dad died with a $100,000 life insurance policy with no designated beneficiary, with more debt than $100,000, and with a Will that left all of his personal property to his surviving wife, then, his surviving wife would inherit the $100,000 free from the claims of Dad’s creditors.

Another Tennessee statute, T.C.A. §56-7-203, provides that the net amount payable under a life insurance policy or annuity which was made for the benefit of a surviving spouse, child or dependent relative is free from the claims of creditors. This statute has been interpreted to apply not only to life insurance policy proceeds payable on death, but also, to the cash value of life insurance policies before death.

The above statutes, importantly, only protect life insurance proceeds from Dad’s creditors.  Let’s assume that Dad and Mom have both personally guaranteed a promissory note to the Bank and Dad dies with a $100,000 life insurance policy in place. The Bank can collect its debt from the proceeds because it is just as much Mom’s debt as Dad’s debt.  The same result occurs if Dad dies with a $100,000 life insurance policy in effect; Dad dies with no debt; but, Mom owes the Bank $100,000 at the time Dad dies.  The Bank can collect from the life insurance policy proceeds under that scenario.

It is important that you consult with an experienced probate attorney before you come to any conclusions about how life insurance policy proceeds should be distributed or whether they are subject to the claims of creditors. The above advice is general advice, and should not be relied upon until you have discussed the facts of your particular case with an experienced lawyer.