Question

question # 9:
ted owns a permanent life insurance policy with his wife laura as the life insured and has named himself as the beneficiary. laura dies and ted receives the death benefit from the policy. unfortunately, laura had a lot of creditors and ted is surprised to receive letters from creditors demanding that he clear the debts using the proceeds of the life insurance policy. are the life insurance proceeds protected from laura’s creditors?
a) the proceeds are protected because ted is laura’s spouse and is, therefore, a preferred beneficiary.
b) the proceeds are not protected because ted, as the policy owner, does not fall under the restricted definition of beneficiary.
c) the proceeds are protected because the policy was owned by ted and not laura.
d) the proceeds are protected because life insurance proceeds are always protected from creditors.
your answer
× the proceeds are protected because life insurance proceeds are always protected from

Explanation:

To determine the correct answer, we analyze each option:

• Option a: Being a spouse doesn't inherently make one a "preferred beneficiary" for creditor protection in this context. The key is policy ownership, not spousal status. Eliminate a.
• Option b: Ted is the policy owner and also the beneficiary. The restricted definition of beneficiary for creditor protection typically includes certain individuals, but Ted as owner - beneficiary: the policy was owned by Ted, not Laura. So this reasoning is incorrect. Eliminate b.
• Option c: Since Ted owned the policy (not Laura), the life insurance proceeds are paid to Ted (the owner - beneficiary) and are protected from Laura's creditors. This is because the policy is a contract between Ted (owner) and the insurer, and Laura's creditors have no claim on assets owned by Ted (the policy proceeds, once paid to Ted, are his property, and Laura's debts are her own, with no claim on Ted's policy proceeds as he owned the policy).
• Option d: The statement "life insurance proceeds are always protected from creditors" is false. There are circumstances where they might not be, such as if the beneficiary is the estate (but in this case, Ted is the beneficiary and policy owner). Eliminate d.

Answer:

c) The proceeds are protected because the policy was owned by Ted and not Laura.